Primer_mining and Steel_may 2011

ab UBS Investment Research Mining and Steel Primer

Global Equity Research Global Mining & Metals Sector Comment

18 May 2011 www.ubs.com/investmentresearch

Peter Hickson Analyst [email protected] +852 29717564

Global Mining Team [email protected] +44 20 7568 3540

Global Steel Team [email protected] +81-35208 6250

Hard rock to heavy metal gets political „ Mining and Steel Primer—2011 update Mining and steel have been among the best performing global equity sectors, but conflicting issues—from China’s growth direction under the 12th Five-Year Plan, pricing bubbles, demand destruction, to resource scarcity—have raised investor concerns. In this report, we set out the issues, indicators, commodities and companies in one easy reference guide. „ Policy continues to dominate prospects after the financial crisis China’s response to the 2008 global financial crisis confirmed its dominance of global mining and steel outcomes. We believe policy rather than economics now leads the market. US quantitative easing and other government stimulus measures have shaped demand and prices; government taxes, regulations and access now shape risk. „ Commodity prices pose questions about future direction Growth in scarcity has been matched by growth in investors. Crude oil exemplifies the issues that drive commodity, mining and steel valuations. Peak production, ‘buy’ rather than ‘build’, consolidation, energy and environmental challenges, and demand responses are shaping future differentiated outcomes. „ Mining and steel equities to be re-rated Comparative valuation multiples are a product of history. The continued unfolding of secular growth, systemic supply and energy constraints question a re-rating of undervalued (difficult to replace) assets. We prefer large-cap, high-quality mining and steel equities in the new age of efficiency and thrifting.

This report has been prepared by UBS Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 260. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Mining and Steel Primer 18 May 2011

How to use this primer The 2011 edition of the introduction to the mining and steel sectors is a guide to the industry, its processes, its markets and its participants in a single source: Q

The industry’s context, major drivers and key indicators are covered in the first two sections, which highlight the impact of China and developing world demand amid continuing supply constraints and rising politicisation of the supply-demand environment.

Q

The underlying commodity markets, producers, end uses, cost structures and price trends are detailed in a standardised fact sheet in section 3. Detailed quarterly commodity comment can be found in Peter Hickson’s Commodity Connections, published on 25 March 2011.

Q

Exploration, mining and metal and steel production processes and emerging social, political and environmental constraints are addressed in section 4.

Q

All major mining and steel companies researched by UBS are referenced in standard fact sheets in Sections 5 and 6. This section has extended to cover coal and services companies.

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Appendices cover glossaries of terms, places and projects; regional data on the distribution of mineral reserves, a short discussion on metals trading, chemical symbols, conversion factors.

A guide to industry processes, markets and participants

Table 1: UBS global mining and steel teams Global

Asia-Pacific

Peter Hickson Julien Garran Atsushi Yamaguchi Tom Price Edel Tully Angus Staines

Basic Materials Strategist/Steel Strategist Global Commodity and Mining Global Steel Global Commodity Global Precious Metals Global Commodity

Global/Europe Global/Europe Japan Global/Australasia Global/Europe Global/Europe

+44 20 7568 4165 +44 20 7568 3540 +81 3 5208 6250 +61 2 9324 2189 +44 20 7567 6755 +44 20 7567 9798

Brian MacArthur Chris Lichtenheldt Matt Murphy Dan Rollins Alana Johnston Shneur Z Gershuni Spiro Dounis* David E. Strauss

Mining & Metals/Specialty Chemicals Mining & Metals Mining, global base metals Mining mid/small cap Mining & Metals/Specialty Chemicals US Steel and Coal US Steel and Coal Non ferrous metals

North America North America Canada Canada North America United States United States United States

+1 416 350 2229 +1 416 814 3719 +1 416 814 1434 +1 416 814 3694 +1 416 814 1449 +1 212 713 3974 +1 212 713 2928 +1 212 713 6185

Alexei Morozov Kirill Chuyko Rene Kleyweg Marcelo Zilberberg

Head of Research, Mining/Steel/Chemicals Metals/Coal/Mining/Chemicals Basic Materials Basic Materials

Russia Russia Latin America Latin America

+7 495 648 2369 +7 495 648 2365 +44 20 7567 7174 +44 20 7568 4029

Saurabh Kothari Olivia Ker Ben Davis David Hallden

European Steel European Mining- Diversifieds European Mining European Mining

Europe Europe Europe Europe

+44 20 75670431 +44 20 7568 4117 +44 20 7568 3472 +46 84 537 330

North America

Emerging Markets - Russia, Latam

Europe

Atsushi Yamaguchi Katsuya Takeuchi Hisami Enomoto Toshinori Ito Sakura Shimizu Navin Gupta Ruchi Vora Gautam Chhaochharia Yong Suk Son Andreas Bokkenheuser Anubhav Gupta Glyn Lawcock Daniel Morgan Brett McKay Jo (Jonathan) Battershill Ghee Peh Wendy W Wang Hubert Tang Haoxiang Lin Xi Chen Janet Sun

Steel & Other Metals Steel & Other Metals Steel & Other Metals Mining Mining Steel & Mining Steel Steel Steel Mining Mining Diversified Mining/Steel Making Materials Diversified Mining/Steel Making Materials Steel Gold and Base Metals Mining & Metals, Global Coal Mining & Metals Steel, Gold Mining, Coal Mining, coal Mining, Steel

Japan Japan Japan Japan Japan India India India Korea Indonesia Indonesia Australasia Australasia Australasia Australasia China China China China China China

+81 3 5208 6250 +81 3 5208 6237 +81 3 5208 6269 +81 3 5208 6241 +81 3 5208 6238 +91 22 6155 6052 +91 22 6155 6078 +91 22 6155 6080 +82 2 3702 8804 +65 6495 5803 +65 6495 5912 +61 2 9324 3675 +61 2 9324 3844 +61 2 9324 3623 +61 2 9324 2834 +852 2971 6448 +852 2971 8403 +86 21 3866 8858 +86 21 3866 8897 +86 21 3866 8897 +86 21 3866 8852

South Africa South Africa South Africa

+27 11 322 7302 +27 11 322 7414 +27 11 322 7319

Emerging Markets - Europe James Bennett Nishal Ramloutan Kane Slutzkin

Diversified Mining Mining, Chemicals Mining, Precious Metals

Source: UBS

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Mining and Steel Primer 18 May 2011

Contents How to use this primer Introduction

page 2 5

—

Global demand firm but is it topping? ...................................................................6

—

Global supply response remains slow ..................................................................9

—

Geopolitical and environmental constraints ........................................................10

Section 1: Sector drivers and valuation

13

—

Supply and demand both drive miners ...............................................................14

—

ESG now pervades and values mining and metals.............................................16

—

Consolidation .....................................................................................................18

—

Industry structure and pricing power...................................................................24

—

Changing industry cost structures ......................................................................25

—

Declining reserves..............................................................................................30

—

Cyclicality confused by reflationary policies........................................................33

—

Long-term demand trends and intensity of use...................................................35

—

Speculative demand a continuing driver .............................................................39

—

Stocking and de-stocking affects cycles .............................................................41

—

China and other emerging economies................................................................42

—

Impact of infrastructure development .................................................................45

—

Valuation methodology and trends .....................................................................45

Section 2: Major indicators

Key indicators of global mining and steel equity performance.............................50

—

China lending, physical and construction............................................................51

—

US dollar and global funds flow ..........................................................................52

—

US ISM indices ..................................................................................................53

—

UBS mining overheating risk index.....................................................................54

—

Crude oil price....................................................................................................55

—

Metals prices (MGMI).........................................................................................56

—

Chinese steel and equity prices..........................................................................57

—

Chinese trade flows............................................................................................58

Global Mining Team [email protected] +44 20 7568 3540

Global Steel Team [email protected] +81-35208 6250

59

—

What are TC/RCs?.............................................................................................60

—

Metal exchanges ................................................................................................62

—

Metals trading – an introduction .........................................................................64

—

Other materials ..................................................................................................84

Section 4: Hard rock to heavy metal

Analyst [email protected] +852 29717564

49

—

Section 3: Metals and commodities markets

Peter Hickson

93

—

How did it get there and how do you get it out? ..................................................94

—

Mine development and mining methods ........................................................... 104

—

Minerals processing (beneficiation) .................................................................. 108

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Steel – a major subset of the metals industry ................................................... 113

—

Stainless steel.................................................................................................. 117

—

Environmental impact of mining and steel ........................................................ 119

Section 5: Major metal, gold and diversified mining companies 121 Section 6: Major coal mining companies 189 —

Companies not covered by UBS ...................................................................... 209

Section 7: Metal trading companies

211

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Mining and Steel Primer 18 May 2011

Section 8: Major steel companies —

215

Other important steel producers ....................................................................... 248

Appendices

249

—

Definitions of common terms ............................................................................ 250

—

Common abbreviations .................................................................................... 258

We would like to thank Amit Gupta, Saurav Agarwal, Jatin Gupta, Arun Kumar Joshi and Mayank Agarwal, employees of Cognizant Group, for their assistance in preparing this research report. Cognizant staff provide research support services to UBS

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Mining and Steel Primer 18 May 2011

Introduction Back and beyond the peaks of 2008…

Mining remains of intense interest; China continues to dominate many materials, now accounting for nearly half of the world’s steel industry; commodity prices eclipse record highs as the US dollar and commodity currencies diverge; however, recent retracement questions sustainability. Government intervention, following the financial crisis of 2008-09, has highlighted that policy outcomes have become just as important as conventional cyclical analysis. Chart 1: Metals, silver, oil and steel prices for past 10 years

Chart 2: Mining, steel and global equity absolute performance

1000

900

900

800

800

700

700

600

600

500

500

400

400

300

300

200

200

100

100

140

30%

120

20%

100

10%

80

0%

60

Oil 2001 2008

Copper 2002 2009

2003 2010

Steel 2004 2011

Coal 2005

Iron ore 2006

2007

Source: UBS

A$ Euro

Jan-10

Jan-11 Jan-11

40%

Jan-10

160

Jan-08

50%

Jan-07

180

Jan-06

60%

Jan-01

200

Jan-05

Chart 4: Currencies movement against US$

Jan-04

Chart 3: China global share of consumption

Jan-03

Source: Thomson DataStream

Jan-02

Source: Thomson DataStream

70%

Jan-09

Mining rel global markets Steel rel to global markets

Jan-09

Mining abs Steel abs

Silv er Steel

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-01

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Copper Oil (Brent)

Jan-02

0

0

Yen Rand

Source: Thomson DataStream

The stellar relative performance of the sectors is prompting questions among investors: Q

Q

Will China’s transition mapped out by the 12th Five-Year Plan (5YP) change the fortunes of mining and steel companies? Are we in a pricing bubble driven by excessive liquidity? UBS 5

Mining and Steel Primer 18 May 2011 Q

When will supply respond to higher prices and cap further increases?

Q

Will demand destruction break the secular rise in prices?

Q

Who are the winners in a resource-scarce world?

Global demand firm but is it topping?

Steel

Source: IISI, ICSG, WBM

Copper

Crude oil

Steel

Copper

2011

2008

2005

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1960

2011

2008

0%

2005

0% 2002

5%

1999

10%

5% 1996

10%

1993

15%

1990

20%

15%

1987

25%

20%

1984

25%

1981

30%

1978

35%

30%

1975

35%

1972

40%

1969

45%

40%

1966

45%

1963

50%

1960

50%

1966

Chart 6: China global share of steel, copper and oil since 1960

1963

Chart 5: US global share of steel, copper and oil since 1960

Crude oil

Source: IISI, WMD, China Customs Statistics

The debate on whether we are in a pricing bubble is confronted, on the one hand, by the natural suspicion of markets and their ability to ‘correct back to a mean’ after long periods of elevated prices and demand destruction. On the other hand, the emergence of China as a dominant consumer of materials suggests that the secular trends of rising prices may continue. China has assumed the mantle from the US as the world’s largest consumer of most commodities. However, there are some materials, such as oil, where the US remains dominant but China’s future growth rate and impact on global market balances are yet to be fully felt. Increasingly, we view China’s emergence as the dominant materials consumer as being a ‘1 in 50-100 year’ event that eclipses the paradigms set in the past 30 years of declining prices in real terms. The intensity of use (IoU) of steel, seen below as a proxy for metals, expressed as per unit of global GDP, reflects major materials consumption patterns of the past 60 years. The IoU doubled in the 30 years to the 1970s, driven by post-war reconstruction and the Japanese economic miracle, only to nearly halve in the following 30 years as the developed economies matured into post-industrial growth. The rise in steel IoU per unit of global GDP in the past five years has been driven primarily by rapid industrial growth in China, augmented by other developing world demand. Cyclical events, such as recessions, have interrupted these secular patterns in the past, as shown in Chart 7, but only temporarily. Over the next couple of years we forecast softer world growth in the face of rising energy and other prices, but we still believe the 5-10 year growth trends in the developing world will remain robust.

The emergence of China as a dominant consumer of materials suggests that the secular trends of rising prices may continue

China’s growth is still a ‘one in a hundred year event’

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Mining and Steel Primer 18 May 2011

Chart 7: Intensity of use of steel per unit of global GDP in kg/US$ since 1960*

Recessions have interrupted the secular patterns in the past, but only temporarily

0.038 0.036 0.034 0.032 0.030 0.028 0.026 0.024 0.022 2012E

2008

2004

2000

1996

1992

1988

1984

1980

1976

1972

1968

1964

1960

0.020

* Bars show periods of recession. Source: IISI, World Bank, UBS estimates

The surging crude oil price has also contributed to the broad commodity price rises

Another key factor contributing to the broad commodity price rises has been the surging crude oil price. Crude oil is by far the biggest commodity market at US$3.5trn in 2011E (assuming 100% traded). By comparison, we estimate the crude steel market at US$1trn, while production of the combined LME metals (aluminium, copper, nickel, tin, lead and zinc) is valued at US$360bn in 2011E, with copper making up half of the metals market value and seaborne traded bulk commodities (coal and iron ore) valued at US$350bn.

Chart 8: Commodity market sizes estimated for 2011, based on Q111 actual and 2011E prices in US$ bn 3500 3000 2500 2000 1500 1000 500

Crude oil

Steel

Grains

metals

Base

Rice

metals

Precious

Nat Gas

seaborne

Iron ore

Coal

seaborne

Sugar

Cotton

0

Source: UBS estimates at end of April 2011

The high oil prices have boosted the global accumulation of so-called ‘petrodollars’. From 2003 to 2010, the accumulated net oil revenue of the world’s oil exporters totalled US$6trn; in 2011 we estimate that net export revenue should clear US$1.2trn. This quantum of money is impacting the demand for materials through increased expenditure on infrastructure and energy-related investment as well as commodity investment.

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Mining and Steel Primer 18 May 2011

Copper

Global BM equity index

Source: Thomson DataStream

Apr-11

Apr-10

Apr-09

Apr-08

Apr-07

Oil Brent

Source: Thomson DataStream

Somewhat offsetting any threat of demand destruction in the developed world

The threat of demand destruction from higher energy and metals prices in the developed world is somewhat offset by the more materials-intensive demand in the resource-richer developing world. But the broad risk of demand destruction is still real and unknown, affected through the diminution of purchasing power. Chart 11 illustrates the cost of national oil consumption as a percentage of GDP with rising oil prices. Chart 11: Impact of oil price on Asian consumption

Chart 12: Food and energy contribution to CPI

11

60

10 50

9 8

40

7

30

6

20

Oil price US$/bbl

10

Source: CEIC, UBS

Korea

US

160

Korea

140 Indonesia

Taiwan

120

Malaysia

100 India

Thailand

80 China

China

0

3

Indonesia

4

India

5

Philippines

Oil consumption % of GDP

Apr-06

Apr-99

Oil Brent

Apr-05

0 Apr-04

0

Apr-03

100 Apr-02

100 Apr-11

200

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200

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Apr-03

700

Apr-02

800

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800

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900

Apr-01

Chart 10: Crude oil and BM equity prices since 1999

Apr-00

Chart 9: Crude oil prices and metals prices since 1999

Source: CEIC, UBS

In China, the rapid increase in prices of oil, iron ore and other metals continues to lift its materials import bill significantly; in 2010 energy and materials imports comprised 24% of the total import bill. This loss of purchasing power will be moderated somewhat by a rising renminbi.

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Mining and Steel Primer 18 May 2011

Chart 13: China’s key materials imports to 2011E (US$ bn)

Chart 14: China’s materials import as % of total imports to 2010

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30% 25%

1400

300

20%

1200

250

15%

1000

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150

10%

600

Steel & its raw mats

Chemicals

Pulp

Source: Chinese Customs Statistics, UBS estimates

Total imports US$bn

2010

2009

2008

2007

2006

2005

2003 2004

2002

2001

2000

1999

1998

1997

0% 1996

2010

2008

2006

Copper & aluminum

5%

2011E

Crude oil

2004

0 2002

0 2000

200 1998

400

50

1996

100

BM % of total imports rhs

Source: Chinese Customs Statistics, UBS estimates

Global supply response remains slow A lack of supply and a poor supply response to higher prices have also driven global prices

Supply response to higher prices continues to be disappointing in a wide range of areas because of rising costs, more complex regulatory environments and deep competition for the available project management and construction resources. For instance, Australia is responding to booming iron ore and coal prices as well as rising demand for LNG. It currently has US$100bn of mining and energy projects committed or under construction with another US$250bn under consideration. The low current supply response is also partly due to a systemic lack of investment over the past 10-15 years that has resulted in poor inventory of undeveloped resources, supporting infrastructure, project development and operating skills. Chart 15: Global mining capex and metal prices (US$ bn)

Chart 16: Capex for the big five miners (US$ bn)

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140

25.0 20.0

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120

250

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80

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60

Capex - US$bn lhs

Source: CRU, UBS estimates

2011E

2009

2007

2005

2003

0 2001

0 1999

50 1997

20 1995

100

1993

40

Metals price index rhs

15.0 10.0 5.0

0.0 Anglo

BHP

2009

2010

Rio 2011F

Xstrata

Vale 2012F

Source: Company data, UBS

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Mining and Steel Primer 18 May 2011

In recent years there has been greater expenditure in exploration and project development; however, the effectiveness of the increased expenditure is muted by higher capex and opex costs. These in turn are driven by energy, labour and materials, more constrained land access and rising tax and royalty charges, physical power and water shortages and by the fact that much of the ‘low hanging fruit’ has been picked. Furthermore, most projects have long lead times, eclipsing five years and in some cases 10 years. The remaining ore resources are characterised by being deeper, poorer in grade, further away from infrastructure and more costly to develop. The effectiveness of the US dollar-denominated expenditure has been lowered by rising nonUS$ currencies and rising costs.

Geopolitical and environmental constraints The uncertain investment environment is not only characterised by very uncertain capital and operating costs but also increased geopolitical, industrial and environmental risks. The higher prices of commodities have encouraged a wide range of project stakeholders, including governments, unions, local communities and NGOs, to increase their demands on future and existing mining projects. The net impact is projected over-runs in time and in costs, and operating disappointments.

Geopolitical, industrial and environmental uncertainties have encouraged project stakeholders to increase their demands on mining projects

Chart 17: Copper mine disruptions Weather (KCM, Mopani) 3%

Overall disruption = 800kt Other 14%

Pit problems (Batu Hijau, HVC) 6%

Strikes (Vale Inco Sudbury, Voisey's Bay) 18% Technical issues (Olympic Dam, Escondida, Ok Tedi) 32% Slow ramp up (Lumwana, Las Cruces, Andacollo, Franke) 27% Source: Brook Hunt based on 2009 data

Copper’s significant production disappointments in the past five years illustrates the gravity of the combination of strikes, falling head-grades, power and water shortages, operating problems and extreme weather events that have cut expected annual mine copper production by c5% annually since 2005. Recent outcomes in Peru-Chile, particularly the delay to Southern Copper’s Tia Maria copper project due to water disputes illustrates the pressure on all new Latam copper mines that are now likely to be mandated to run on desalinated-seawater, adding to the cost and regulatory burden of new projects. The current litany of these problems suggests that this level of supply shortfall could continue in years to come although with some volatility in output. The magnitude of the average loss of 0.9mt of copper a year has dwarfed the impact of declining demand, and has promoted very strong and volatile prices.

The net impact is projected overruns and operating disappointments

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Mining and Steel Primer 18 May 2011

Faced with such uncertainty, mining management continue to deploy their significant cash flows in M&A rather than greenfield project development, further adding to the ongoing supply issues. The focus on existing resource assets is also highlighting the strong country differentiation in resources wealth. China, the US, Russia and Saudi Arabia have the strongest portfolio of energy, metals and agricultural output on an absolute basis; on a per capita basis Saudi Arabia, Canada and Australia are well placed and continue to underpin the currency strength in a period of strong commodity prices. Chart 18: National distribution of resources wealth 16

US$k/person

Chart 19: Commodity currency movements

US$ bn

800

160 150 140

12

600

130 120

8

400

4

200

110 100 90 80 70

Metals Res. w ealth/capita (LHS)

Rmb rel real rel

Source: BP, Brook Hunt, USDA, UN, UBS estimates based Q111 prices

A$ rel Rand rel

Apr-11

Oct-10

Apr-10

Oct-09

Apr-09

Oct-08

Apr-08

Oct-07

Apr-07

Apr-06

Indonesia

Mexico

Australia

Canada

Iran

India

Europe

Brazil

Saudi

Russia

US

Energy Agriculture

Oct-06

60

0 China

0

C$ rel

Source: Thomson DataStream

The degree to which currency adjustments add or subtract from US dollar costs is illustrated in Table 2. For instance, Australia, Brazil, Chile and Canada—key commodity exporters—have seen their currencies appreciate against the US dollar by 30%, 23%, 19% and 16% in aggregate from 2010 to April 2011. Table 2: Annual appreciation of national currencies relative to the US$ Japan

Europe

Australia

Brazil

Canada

Chile

China

India

Indonesia

Russia

St. Africa

2008

13%

7%

3%

8%

3%

1%

9%

-4%

-5%

3%

-13%

2009

13%

-5%

-9%

-12%

-9%

-9%

2%

-11%

-8%

-23%

-4%

2010

8%

-4%

16%

15%

10%

10%

1%

5%

13%

4%

13%

2011E

10%

4%

14%

8%

6%

9%

4%

2%

3%

4%

7%

Source: Bloomberg (2011E Jan-Apr annualised)

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Mining and Steel Primer 18 May 2011

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Mining and Steel Primer 18 May 2011

Section 1: Sector drivers and valuation

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Mining and Steel Primer 18 May 2011

Supply and demand both drive miners Mining and metals companies tend to be more complex to analyse than many other equities due to the large number of drivers and variables that can affect company performance and hence profitability and stock performance. With so many different products available and very few single product (‘pure’) producers, it is necessary to generalise some of the input drivers. In this section we address the key drivers of both earnings and valuation. In the main, with a few noticeable exceptions, these can be split between supply-based drivers and demand-based drivers.

Key earnings and valuation drivers are split between supply- and demandbased drivers

Supply-based drivers Resource nationalism on the rise

Q

Politicisation of resource access: Resource nationalism is on the rise, witnessed in a range of increasing government interventions in resource development. Rising prices have induced a range of higher taxes and royalties, including the proposals and changes in Australia, a long time investor-friendly environment. We believe that fiscal pressures and social responses to wealth distribution will see the mining industry face rising taxes and government imposts that will make project development more challenging and ultimately contribute to rising prices.

Q

Consolidation: The mining and steel sectors have seen some of the highest levels of consolidation within basic materials since the mid-1990s. This has underpinned valuations over the past few years and looks set to continue with rising cash flows and increasing strategic competition. Developing world and state-owned companies are becoming increasingly assertive. With rising risks and costs, the ‘buy rather than build’ remains attractive. Replacement value suggests that many existing assets could be undervalued.

Consolidation – better to buy than build

Q

Industry structure and pricing power: Continued consolidation has seen the industry structure in many commodities improve and has led to pricing power in some sectors. With tightness in supply a dominant issue, we are observing a significant rise in pricing power particularly in the steel-making raw materials chain, where the apparent ease of passing costs through has facilitated these price rises.

Mining pricing power lifting

Q

Rising costs: The flip side of pricing power is cost inflation, and the mining and steel sectors are seeing rapid cost advances in commodity currencies, raw materials, power, diesel (oil), royalty/taxes and labour. The key risk is potentially declining margins. Increased competition for limited human resources is adding specifically to rising labour costs.

Costs also rising fast

Q

Rising disruptions including weather: Rising prices have also raised stakeholder expectations such that the frequency and duration of industrial activity has risen in the past three years. Additionally, operational disruptions have increased as planned maintenance programmes have fallen while weather impacts have become very significant. The dramatic coking coal price hikes in 2008 and in 2010 were directly related to the flood of Australian coal fields. Power and water shortages are also increasingly impacting supply, particularly in Latam copper production. China’s primary resource industries are also starting to be constrained by water shortages.

Climate and weather a new significant impact

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Mining and Steel Primer 18 May 2011 Q

Declining reserves: While consolidation is considered to have been a positive for the industry, it has led to a halving of the number of exploration teams. Persistently low metal prices of the previous decade have resulted in a declining inventory of projects, while existing mineral projects face lower grades. The phenomenon of lower grades over time is a function of mine planning that attempts to maximise cash flows by mining the higher grade first. It could also be said that the higher grade deposits (‘low hanging fruit’) have been first, leaving lesser quality ore bodies for future production.

Resource quality falling

Demand-based drivers Policy in ascendancy after GFC

Q

Policy driven: One of the most significant impacts on demand since the financial crisis in 2008-09 has been the direct intervention by governments to stimulate demand. China and the US have been the leading activists in policy driven demand. While we expect this to diminish with the completion of the US quantitative easing and moderation in China’s loan growth, policy will nevertheless remain a key demand driver in the coming years.

Q

Cyclicality: The mining and steel sectors, in common with all basic materials sectors, are correlated to the global industrial production cycle, in terms of earnings and hence in terms of stock performance; although stocks tend to pre-empt it. Cyclicality in recent years has been confused by government stimulus packages.

Cyclicality not dead

Q

Long-term demand trends and intensity of use: Over the past 20 years, as the US economy has dominated, metals prices have been decreasing in real terms. The advent of China’s growth cycle is changing global consumption patterns because of higher IoU trends. The demand supplementation by India and other developing economies is likely to add structural underpinning to future demand.

Secular growth in EM

Q

Speculative demand: As commodities prices have increased, speculative interest in the commodity asset class has risen both in direct investment and in specialised commodity funds. While most investments are on the futures markets and do not directly contribute to physical demand, the exchange traded futures (ETF) investments do actually impact physical demand and in precious metals have risen to significant if not de-stabilising levels. Low real interest rates and high global liquidity have augmented investor appetite, increasingly in China.

Speculative buying lifting prices

Q

Stocking and de-stocking impacts: Many investors underestimate the impact of stocking and de-stocking cycles on industry demand outcomes. Often demand trends at the beginning or end of a cycle can be intensified by these effects. In many materials, China’s dominant size and its own stocking and restocking cycle can impact global markets, such as copper.

Stock cycle still important

Q

Environmental factors: We expect the emerging targets to improve energy efficiency, lower carbon emissions reiterated in China in the 12th Five-Year Plan that seeks a further 17% reduction in energy and carbon per unit of GDP and a 30% reduction in water use per unit of GDP. We see thrift and recycling of resources becoming a new factor in shaping primary demand of resources.

Environmental constraints real

UBS 15

Mining and Steel Primer 18 May 2011

Supply and demand-based drivers China 40+% of global consumption of many commodities

Q

The China effect and other emerging economies: China continues to be a differentiator of investment prospects particularly where there are significant shifts in trade patterns, such as China moving from being an exporter to an importer, as has occurred significantly in the past two years in coal. Uncertainties about its economic transition, outlined in the 12th Five-Year Plan, from industrial intensive to more consumer intensive growth and the shifts to significant lifts in energy, water and emission efficiencies could have impacts on key industries such as steel and aluminium. The balance of domestic consumption and production in other developing economies, such as India, Russia, Indonesia and Latin America, also add to volatility in global market balances.

Q

The impact of exchange rates: Metals prices and metals’ stock performance are strongly correlated to exchange rates and particularly to the US dollar. This is primarily because over 70% of materials production comes from outside US dollar-denominated regions. As the dollar strengthens/weakens it alters the production economics of suppliers and consumers. Alternatively, rising currency rates in China, Brazil, Australia, Canada and commodityintensive countries will affect both supply cost structures and demand appetites. The Q111 dramatic rise in commodity currencies is likely to cause some significant earnings downgrades.

Volatile exchange rates play havoc with costs

Q

Infrastructure—transport and energy: Infrastructure investment and development continues to lag, not only by the major western countries, but also by emerging regions like China, India and Indonesia. The US, Chinese, Brazilian and Indian governments have all identified significant infrastructure bottlenecks, such as power and ports, and are moving to address them; however, the legislative support for land access is proving to be slow. Indonesian coal, the world’s largest exporter, appears to be increasingly constrained by a lack of land access for infrastructure (rail) development.

Infrastructure a constraint in many commodities

ESG now pervades and values mining and metals This review of key factors above clearly demonstrates the growing pervasiveness of environmental, social responsibility and corporate governance (ESG) issues in the mining and steel sectors. Geopolitical and environmental constraints highlight the issue of resource scarcity as not just an environmental problem but also a social and governance issue. Environmental impacts of mining and steel are underpinning our preference for large-cap, high-quality mining and steel equities that can respond to the new age of efficiency and thrifting because we see such companies are demonstrating they are better positioned to deal with the significant challenges. For mining the key ESG issues that are increasingly becoming financially material are availability of raw materials, skilled labour and the availability of capital that is dependent on credit rating and company reputation, and potentially also resource taxes.

Environmental, social, geopolitical and governance impacting profitability

ESG concerns appear in many formats

UBS 16

Mining and Steel Primer 18 May 2011

The environmental impact of mining is a key condition of most mining leases such as the management of operational impacts such as air, water, noise and dust emissions. Agreements with local and indigenous communities who are exposed to disruption and intrusion of operations and the indirect social impact are rising in importance. Clarity and security of lease entitlements, the key to sustainable operations and investment decisions, are founded on lease and government relations. In the end, the access to raw materials is conditional on government and local community support; global shortages are adding to access competition and straining governance standards.

Stock cycle still important

Table 3: A framework for thinking about the impact of ESG on mining and metals Key ESG questions

Key ESG issues

What are the most important core drivers

External dependencies (access to mining assets, political conditions on location), reputation, human capital. Currently: willingness of competitors to ignore reputational issues such as human rights

The most important financial metrics

Commodity prices, extraction and production costs, profit margins. Contingent liabilities

The environmental and social issues that could affect 1 and 2

Environmental clean-up costs. Competitors saving costs through ‘dirty’ operations. Governments tightening regulation – positive for firms with high standards

The most important Governance issues that could affect 1 and 2

Increasing political/country risk

What are the greatest opportunities and risks (business as usual)

In the medium term the main growth opportunity lies in capturing access to potential recycling opportunities in rare or scarce metals and minerals

Potential environmental social or governance catalysts

Resource taxes – the move recently announced in Australia (note footnoted) could trigger similar moves in other countries

Source: UBS

The infrastructure of a mining operation includes power, water and transport availability. The added load on transport, power and water systems of new mining projects may threaten the current community use and hence require an accountability and openness about their impact.

Power, water and transport

Infrastructure constraints can often be amplified by the remoteness of the project location and the state of development of the host country. Water usage is increasingly forming a key component of mine operations with recent headline outcomes in Latam implying that many copper mines will now have to supply their own water, and in most cases it will be sea or desalinated water, imposing a new set of cost and operating challenges. Fears of ore mining and processing potentially contaminating surface and ground water are becoming the basis of stopping mining in some regions.

Location also amplifies risk

Finally, mines at the end of their lives can pose long-term environmental liabilities, particularly in the treatment of water to prevent contamination of surface and ground water. For example, the total liability to the Canadian government for acid rock drainage from former mine sites is now around US$2bn-5bn.

End of mine life costs rising

UBS 17

Mining and Steel Primer 18 May 2011

Local and imported skills are critical for mining operational success while an ageing workforce and a falling pool of skills can adversely affect mining performance. Specifically mining companies have to increasingly provide onsite or fly-in-fly arrangements. There have been recent skills crises in Australia and Canada where multiple resource booms are outstripping the availability of labour resources. Labour also appears to be becoming more globally mobile with examples of Mongolian mining companies advertising in Chile for skilled labour. These outcomes are clearly adding to relative costs and highlight the growing importance of the ESG impacts.

Skills shortage poses global competition

Corporate ESG ratings are becoming another indicator of sustainable and profitable performance. Chart 20 illustrates the ESG rating (GMI index) plotted against valuation (2011E PE).

Companies ESG or GMI rating an indicator of financial performance

Chart 20: Valuation and Governance rating 14

PER 2011E

12

Below median GMI, above avge valuation Imerys

Xstrata Antofagasta

10

BHP Billiton Anglo American

Boliden

8

ENRC

Rio Tinto Kazakhmys Above median GMI, below avge valuation.

6 Vedanta

4 2.0

4.0

6.0

8.0

10.0

GMI Global Overall Rating X axis crosses at 6.5 (GMI median). Y axis at 9.4 (Global Banks Average PE 2011E). Source: GMI, UBS estimates

Companies also have to invest in accelerated training and development programmes to supplement falling skills levels in the community; these employee development programmes are seen as win-win outcomes that both lift productivity and worker satisfaction. Transparent development and remuneration policies support sustainable operations. These incentives have an impact on costs and volume output (revenues); operational performance is directly proportional to collective skill and operating experience levels, while remuneration is difficult to manage within very volatile revenue and price environments

Development and training among the rising challenges

Consolidation The mining industry has had a very active decade of consolidation with dramatic changes in the industry; both BHP Billiton and Rio Tinto are products of consistent M&A programmes. Xstrata, Vale, Vedanta and Rusal have also grown significantly through acquisitions. Chart 21 illustrates global M&A in the past decade that has totalled US$950bn in large (>US$1bn), medium (US$0.2bn) and small (0.2 suggests high risk

0.4

Source: Bloomberg, UBS

Explanation

Our mining overheating risk index is made up of three- and six-month changes in US bond yields and oil prices. It has a strong track record of highlighting risks of macro surprises and to equity correction and it is firmly in the danger zone. In August 2010, the strong negative reading meant that US consumers were receiving a powerful boost from cheap gas and mortgage refinancing. Macro data surprised to the upside aggressively over the subsequent six months, and miners performed strongly. With the index in the danger zone, it suggests that the US consumer is being squeezed and that, in turn, is set to trigger a lull in commodity demand and a round of commodity destocking.

UBS risk index comprises of bond yields and oil price changes

Key periods

The risk index has long track of highlighting the risks of overheating and is particularly sensitive in outlying conditions. When not to use it?

Of the 15 events when the FTSE fell more than 10% in three months the risk index above 0.2 predicted four events; there were four events when there was not a corresponding correction over 0.2 and there were nine events when the market fell more than 10% in three months with the risk index below 0.2. Again China’s influence is starting to overshadow US centric data points. Future – still useful?

Given the earlier caveats about China we still think this is a useful indicator in part because we believe China will become more responsive to traditional cyclical indicators such as oil price and bond yields. Other related indicators

There are many other indicators that reflect similar conditions; ISM new orders less inventories also reflects overheating and works well as a ‘leading indicator of the leading indicator’. Other price indicators such the Shanghai/LME arbitrage and the China/US steel are ways of integrating a China view on overheating. UBS 54

Mining and Steel Primer 18 May 2011

Crude oil price Chart 82: World mining index and crude oil prices

Chart 83: World steel index and crude oil prices

3500

140

3500

140

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3000

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2500

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2000

80

2000

80

1500

60

1500

60

1000

40

1000

40

500

20

500

20

World mining abs perf lhs

Source: Thomson DataStream

Oil brent US$/bbl rhs

World steel abs perf lhs

Apr-11

Apr-09

Apr-07

Apr-05

Apr-03

Apr-01

Apr-99

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0 Apr-93

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0 Apr-91

0

Oil brent US$/bbl rhs

Source: Thomson DataStream

Explanation

The crude oil price seems to have assumed de facto leadership of the broad commodity and related equities. The oil prices, we believe, have risen because of tight supply conditions (a product of low capex, a declining resource base, and geopolitical constraints), rising incremental demand in China and the developing world, and investor interest in this biggest commodity asset class. All three factors are present in other commodities and their equities, but oil appears the most leveraged to all three. Steel’s relationship to oil also is linked because steel demand is stimulated by energy-related construction.

The crude oil price has assumed de facto leadership of commodity equities

Key periods

Oil’s leadership was manifest from about 2003. There were periods in 2006 when mining and steel equities looked through oil’s price correction, but oil leadership of resources and commodities sentiment has been powerful though 2011. When not to use it?

We expect the oil price to be a powerful trend/technical indicator and short-term fluctuations may confuse. Some suggest oil is not a lead indicator but rather a co-incident indicator. Future – still useful?

We still believe that if the oil price continues to trend higher it will underpin positive sentiment in the metals and steel sectors. On the other hand, if the oil price retreats, either through slower demand or alleviation of tight supply, then we believe the broad mining and steel equities will also retreat. Other related indicators

China’s oil imports; there has been good correlation between global oil prices and China’s net imports.

UBS 55

Mining and Steel Primer 18 May 2011

Metals prices (MGMI) Chart 84: Metal prices and world mining index

Chart 85: Metal prices and world steel index

3500

500

3500

500

3000

450

3000

450

World mining lhs

Source: Thomson DataStream

Metal price index rhs

World steel lhs

Apr-11

Apr-09

Apr-07

100 Apr-05

0 Apr-03

150 Apr-01

Apr-11

Apr-09

Apr-07

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Apr-03

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Metal price index rhs

Source: Thomson DataStream

Explanation

The Metals Index (MGMI) covers six base metals traded on the London Metal Exchange. The weighting of each metal – aluminium (43%), copper (25%), zinc (16%), lead (14%), nickel (2%) and tin (0.5%) – was calculated by comparing each metal’s consumption in the Western world with the total consumption of all six metals in the base year 1985. It is priced in US dollars.

Metal prices are a robust indicator of broad industrial demand

The price of metals is directly linked to the profitability of mining companies – if prices go up, then cash flow and hence profits generally increase (excepting the effect of exchange rates); if prices go down the opposite occurs. Hence, this is a widely monitored index and usually moves in line with mining equities. Interestingly, the metals index correlates well with world steel index despite the fact that there is no direct linkage to steel companies’ earnings. This illustrates that metal prices are a robust indicator of broad industrial demand – a common driver of steel. Key periods

The run up in metal prices in early 2003 to 2008 led both the equity prices rise to 2008. In the financial crisis and recovery, metal prices have moved particularly with mining equities. In recent years, steel equities have fallen behind because of the substantial margin squeeze of the rapidly rising spot price and the shift to short term contract pricing of steel making raw materials. When not to use it?

In period of stable prices other factors may be more influential. However, China is increasingly linked to metal prices consuming over 30% of most metals. Future – still useful?

We believe this is still useful, and the availability of metal prices data (daily prices and stock levels) aids its use. Other related indicators

Gold price, metal inventories, other price indices such as Reuters CRB Index. UBS 56

Mining and Steel Primer 18 May 2011

Chinese steel and equity prices Chart 86: World mining index and China steel prices

Chart 87: World steel index and crude oil prices

350

500

350

1800

China HRC steel price US$/t lhs Source: CRU, Mysteel, MEPS,UBS

World mining

China HRC steel price US$/t lhs

Mar-11

2200

Dec-10

400

Sep-10

1000

Jul-10

400

Apr-10

2600

Jan-10

450

Oct-09

1500

Aug-09

450

May-09

3000

Feb-09

500

Nov-08

2000

Sep-08

500

Mar-11

3400

Dec-10

550

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2500

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550

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3800

Jan-10

600

Oct-09

3000

Aug-09

600

May-09

4200

Feb-09

650

Sep-08

3500

Nov-08

650

China A-share

Source: Thomson DataStream, Mysteel

Explanation

China steel prices reflecting both the broad economic growth in China but also in the global commodity markets. China is now the centre of the global steel business, with approximately 45% of global production and consumption. Increasingly, Chinese steel prices are taking leadership both in global steel prices and in global equity sentiment. The price differential between China and other major steel regions, such as the EU and the US, is also assuming a significant lead role in assessing likely global trade trends.

Chinese steel prices and world mining and steel equities have been correlated since 2008

Key periods

Chinese steel prices have assumed a global influence since 2002 where they led the substantial recovery of global steel equities. Since 2008, Chinese steel prices and global mining equities have risen in a strong update trend. When not to use it?

Chinese steel prices have increasingly under gone significant corrections in recent years mainly driven by domestic government policy rather than broader macro conditions. That said Chinese government policies have wider impact on global mining and metals. Future – still useful?

We increasingly look to the daily price series now developed in China for the range of steel products as an early lead indicator of Chinese steel market balances and, by inference, global market balances. We believe a significant inflection in Chinese steel prices would have significance for global steel and mining equity performance. Other related indicators

China’s oil and copper imports; there is interesting correspondence between these indicators, and they help in discerning whether steel prices have been influenced by domestic or global balances. UBS 57

Mining and Steel Primer 18 May 2011

Chinese trade flows Chart 88: China net imports rel to 2001 for iron ore, alumina, copper (12mma)

Chart 89: China net imports of total coal and steel in mt (12mma) 15

1,000 900

10

800 700

5

600 500

0

400 300

-5

200 100

Source: Chinese Customs Statistics, UBS

Jan-11

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Jan-01

Iron Ore mt Net copper imports kt

Jan-01

-10

0

Steel net imports mt Coal total net imports mt

Alumina mt

Source: Chinese Customs Statistics, UBS

Explanation

China’s trade in key commodities has increasingly affected global balances. Furthermore, those trade patterns and inflection points have pre-empted balances and prices in global markets. The six most affected commodities are steel, aluminium, copper, zinc, thermal coal and crude oil. Chart 88 plots the relative performance of imports highlighting that only recently have iron ore imports stabilised whereas for alumina they continue to decline. These megatrends are very important for global pricing. Chart 89 highlights the dramatic shift in China’s coal trade to net imports but prompts the question, what next?

Steel, aluminium, copper, zinc, thermal coal and crude oil are most affected by China trade

Key periods

Inflection points in these trade trends are the most significant periods and often reflect structural changes in domestic and international supply. Examples are in 2005 when China’s net steel import peaked, in 2009 when coal imports soared and in 2010 when both iron ore and coal imports stabilised at high levels. When not to use it?

The series plotted above are three-month moving averages and as such still represent significant volatility on a monthly basis and therefore the determination of trend inflection may take several months before confirmation. Future – still useful?

We monitor these trade flows on a monthly basis. With potential industrial transition and rationalisation in China under the 12th 5YP, these statistics should provide early confirmation of the effectiveness of Chinese policies. Other related indicators

Other China trade data including pulp, platinum, PVC, cement and others tend to mirror and corroborate messages derived from the six primary trade materials listed above. UBS 58

Mining and Steel Primer 18 May 2011

Section 3: Metals and commodities markets

UBS 59

Mining and Steel Primer 18 May 2011

Commodities markets and how they work Some miners are fully integrated and process the material they mine internally, selling it on to industrial consumers. Other producers sell on to an established terminal market, for instance an exchange, while some commodities are priced and sold by individual producers.

What happens to the material once it has been processed?

Prices There are two types of pricing prevailing in the metals industry: spot and contract pricing. Spot pricing in most metal industries is based on exchangetraded pricing. Other commodities, including bulk materials have been traditionally sold under longer-term contracts, normally negotiated annually. These benchmark prices were often concluded between suppliers and consumers and then referenced throughout the industry. In recent years there has been a dramatic change in bulk pricing, moving to much shorter duration contracts (quarterly) and to a greater use of spot pricing. We are seeing a growth in electronic exchanges aimed at facilitating the spot pricing of bulk materials. It is envisaged that the volumes transacted will grow and that the pricing of bulks will increasingly be at spot prices despite ongoing resistance by some of the global steel industry.

Spot and contract pricing important in the industry

What are TC/RCs? In metals there is an intermediate pricing system between the mines and the smelters, referred to as ‘TC/RCs’. TC refers to treatment charges (= smelting costs of the copper concentrate), and RC represents refining cost (the anode electrolysis cost). The smelting cost (TC) is quoted in US$/t of concentrate while the refining cost (RC) is quoted in US¢/lb. The total TC/RC is quoted in total US¢/lb. The conversion of the TC in US/t to US¢/lb factors in concentrate grade that can ranges from 25-35% copper. For example a TC of US$58/t of a 30% copper concentrate is equal to 58/22.04/30% ie 8.7¢/lb. This is added to the RC of 5.8¢/lb to yield the total TC/RC of 14.5¢/lb. Hence a quoted TC/RC of US$58/t and 5.8¢/lb is equivalent to a total TC/RC of 14.5US¢/lb.

Intermediate pricing (TC/RCs) arises between mines and smelters

There are sometimes price participation clauses (PP) in smelter contracts. The price participation determines the smelters’ share in the event of prices changes from a standard level. For example, a PP at 10% implies that if the copper price rises by 10¢/lb, 9 ¢/lb is assigned to copper mines and 1¢/lb to smelters. In the early 1990s, the PP was set at around 30%, but as supply-demand for copper concentrate remained tight, the PP was cut to around 10% in the 2000s and has generally been eliminated in recent years.

UBS 60

Mining and Steel Primer 18 May 2011

Chart 90: Copper TC/RC and PP (Price Participation) trends 50 ¢/lb 40 30 20 10 0 FY03

FY04

FY05

FY06

FY07 TC/RC

FY08

FY09

FY10E

FY11E

PP

Source: CRU, UBS estimates

Bulk contract prices Key bulk contract pricing negotiations are now moving onto quarterly pricing system for iron ore and are replacing the former annual benchmark system which was in place for 40 years as China lifted its share of iron ore imports to be become by far the dominant buyer. The quarterly pricing system allows producers to better accompany movements in spot-market prices. In coking coal, BHP Billiton, the world’s largest producer, leads the negotiations and has settled quarterly price contracts with Japan’s major mills. In recent months, BHP Billiton has been offering incentives to the world steel mills to buy coking on a quarterly, not annual basis. Again we expect a continuing to drift to shorter contracts or spot pricing.

Historically, bulk contract negotiations for iron ore, coking and steaming coal have been annual.

BHP leads the negotiations for coking coal contracts - moved onto quarterly pricing in recent months

In steaming coal, the annual contracts were traditionally set between Japanese power utilities and Australian producers. However, China’s inability to reliably supply the North Asia market has reaffirmed Australian-Indonesian leadership in price settlement into Asia, generally priced on a FOB (before freight costs). South Africa continues to dominate European supply, but it is increasingly priced on a spot basis referenced to the Asian price but more generally on a CIF basis (after freight and insurance costs). Bulk material contracts have been traditionally pegged to the start of the Japanese fiscal year, starting on 1 April. Alumina benchmark prices have generally been set by the largest suppliers, but they are also referenced back to the aluminium price. The alumina contract is priced ranging from 12-14% of the aluminium price but again the spot price, driven by Chinese needs, is increasingly dominating the global alumina market.

Freight issues Most bulk and metals pricing is covered by two forms of selling conditions: with or without freight and insurance included in the price. Q

FOB (free on board) pricing includes freight costs from the mine/smelter to the port, and port handling charges.

Q

CIF (cost, insurance and freight) pricing includes the additional seaborne freight and handling, as well as insurance costs. UBS 61

Mining and Steel Primer 18 May 2011

Freight prices are particularly significant and have been very volatile in bulk materials, where the differential in terms of freight costs from key suppliers to key markets can be higher than the value of the cargo. Chart 91 illustrates that the shipping of iron ore to China from Brazil cost on average US$25/t in the past 12 months, more than double the US$10/t cost from Australia to China.

Freight prices can be especially significant for bulk pricing

Chart 91: Brazil and Australia freight costs to China (US$/t) 120 100 80 60 40 20

Av g. Brazil-China

Jan-11

Jan-10

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Jan-07

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Jan-04

Jan-03

Jan-02

0

Av g. Australia-China

Note: Capesize from Brazil and Australia to China. Source: Clarksons

Metal exchanges There are three major exchanges - The London Metal Exchange (LME), New York’s Commodity Exchange (COMEX) and the Tokyo Commodity Exchange (TOCOM). The LME functions as a clearing market for metals, offering both spot and futures contracts, while COMEX is more of a speculative market, attracting a higher proportion of individual investors than the LME. The Shanghai Futures Exchange is increasing in importance.

Three major metal exchanges; LME, COMEX/NYMEX and TOCOM (Shanghai Futures Exchange is increasing in importance

LME The LME is the world’s leading non-ferrous metals market, which achieved volumes of 120m lots, equivalent to US$11.6trn in 2010. It is a 24-hour market through inter-office trading, but also has defined periods of open-outcry trading between ring-dealing members. The open-outcry periods are highly transparent, reflecting the current supply/demand situation. The LME’s official prices, announced daily, are used by the global industry as the basis for contracts for the movement of physical metal.

LME is the leading base metals exchange; its official prices provide the basis for metal price contracts

Trading takes place electronically around the clock at the LME, but there are also several important open-outcry periods, timed as below Q

11.45: The day’s first open-outcry period with five minutes per contract (eight contracts altogether).

Q

12.30: Another open-outcry period. This is the focal point of day as it gives rise to settlement and official prices.

Q

15.10: Second floor trading session. Five minutes for each contract, then repeated as above (no official prices are produced in the afternoon).

UBS 62

Mining and Steel Primer 18 May 2011

Contracts and warehousing The LME futures and options are described opposite. Futures and options based on an index (LMEX) of six primary base metals are also available. All LME contracts assume delivery of physical metal. To meet this need, large stocks of metal are held in warehouses approved, but not owned by the LME at selected locations around the world. There are more than 350 approved warehouses in 42 locations in 12 different countries. Metal stored in LME warehouses must be of an LME-approved brand or produced by an LMEapproved producer, conforming to the specifications covering quality, shape and weight, as defined by the specific contract rules at the LME. Only a small percentage of LME contracts actually result in delivery, the vast majority being hedged or sold back before falling due. Delivery of these contracts is in the form of warrants, which entitle the bearer to take possession of one lot of metal at a specific LME-approved warehouse.

COMEX/NYMEX The New York Mercantile Exchange (NYMEX) was founded in 1872 as the Butter and Cheese Exchange of New York. As the product base broadened, it became NYMEX 10 years later. In 1994, NYMEX merged with the Commodity Exchange (COMEX). The trading operations continued as two divisions, each offering trading in their respective futures and options contracts: energy, platinum and palladium for the NYMEX division; and gold, silver and copper for COMEX (aluminium has since been added).

A major exchange for energy, precious metals, copper and aluminium

TOCOM The Tokyo Commodity Exchange (Tokyo Kogyohin Torihikijo), or TOCOM, was created on 1 November 1984 by consolidating the Tokyo Gold Exchange, the Tokyo Rubber Exchange and the Tokyo Textile Commodities Exchange. It took over the gold futures contract, priced in yen, originally launched by the Tokyo Gold Exchange in March 1982. The contract traded is for 1kg of 99.99% gold. Systems trading has been used for precious metals since 1991.

Precious metals and aluminium

Initially the exchange attracted only local business because of the difficulty of foreign dealers becoming members and relatively high charges compared with COMEX, but from 1987 volume exceeded two million contracts annually and the exchange attracted more international participation by offering associate membership for foreign dealers. A further waiving of membership charges in 1994 pushed volume to more than 10 million contracts annually, with many small speculators building up long positions. Commodities traded on TOCOM include gold, silver, platinum, palladium and aluminium.

UBS 63

Mining and Steel Primer 18 May 2011

SFE (Shanghai Futures Exchange) Shanghai Futures Exchange, or SFE, was formed in May 1999 from the amalgamation of the Shanghai Metals Exchange, Shanghai Commodities Exchange and Shanghai Grains & Oils Exchange. After the frenzy of early 1990s, by the end of the last century China successfully cut down the number of commodities exchanges from 10 to only three. SFE handles metals and industrial materials while Zhenzhou Commodities Exchange and Dalian Commodities Exchange share the agricultural contracts (sugar, corn, soybean, wheat, etc).

Copper, aluminium, zinc, rubber, fuel oil and gold

SFE’s flagship copper contract has been trading since May 1992 and it serves as an important price index, along with the copper contracts that trade on LME and COMEX. Arbitrage has been a constant feature, given that it is a local market driven by both international prices and Chinese economic activity. SFE launched zinc contracts in March 2007 and gold contracts in January 2008. Fuel oil contracts are also active, given China’s role in the regional high-sulphur fuel oil market. Due to China’s FX control regime, no foreign entity is allowed to trade on SFE currently. It is only accessible to entities incorporated and individuals that reside in China. The appendix contains information on metals trading, strategies and hedging.

Metals trading – an introduction Producers and consumers of metals are subject to the vagaries of the metal price cycle. Where the metal trades on an exchange, or in a well-established over-thecounter (OTC) market, the producer has little ability to negotiate its selling price and the consumer tends to buy metal with reference to a benchmark price, with little ability to negotiate a discount. Producers and consumers do have the ability to manage their metal price through the use of derivative contracts, either intermediately or directly with each other. Precious metals markets are the largest and most sophisticated derivative markets, and producers and consumers can manage their gold price risk using derivatives.

Vanilla forwards Arguably the simplest form of metal price management is the forward sale (or purchase). Precious metals forward prices are calculated using four parameters: the spot metal price: the tenor of the agreement: the US interest rate: and the gold interest rate. The forward gold price is calculated as follows: Forward = spot price + (spot price x (US dollar price interest rate

- Gold interest rate) x days

360

UBS 64

Mining and Steel Primer 18 May 2011

Both US dollar and gold interest rates are available from market data sources such as Reuters and Bloomberg, and while US dollar interest rates are easily understood, the interest rate of gold is an unusual concept to the uninitiated. Holders of gold, predominantly central banks, lend the metal via an OTC market. Because the stock of central bank gold is vast (at c30,000 tonnes, or about 12 years of annual gold production), interest rates are normally low and almost always lower than US dollar interest rates. Consequently, from the formula above, the forward price for gold is higher than the spot price, which is another way of saying that gold is always in contango. The mechanism of a forward sale is very simple. A producer enters into an agreement to deliver gold to a commercial or investment bank (known as a ‘bullion bank’) at some future date at a pre-determined price. The bullion bank, in order to hedge its risk, borrows gold (directly or indirectly) from a central bank, sells that gold into the spot market and invests the proceeds in the US dollar interest rate market. At maturity, the producer delivers gold to the bullion bank, which returns the gold (plus interest) to the central bank, thus ending the borrowing agreement. The vanilla forward has the following important characteristics: Q

Producers that enter into a forward sales agreement cause supply to come to the gold spot market before (in some cases years before) the gold is produced.

Q

Although described as ‘producer selling’, the gold mining company does not sell any gold, rather the producer’s counterparty, ie, the bullion bank, sells gold to hedge its risk.

Q

In the forward sales agreement described above, neither party has any metal price risk as a result of this transaction. The gold mining company has reduced its risk by guaranteeing the gold price that it will receive for some of its gold. The bullion bank has no metal price risk because it will deliver dollars to the producer at maturity and return the gold to the central bank. The central bank’s metal price risk does not change as a result of this transaction.

Q

At maturity, the gold price will very probably be different from the forward price agreed. If the spot price is higher than the contracted forward price, the gold mining company receives a premium to what it would have received. If the spot price is lower, then the gold mining company receives that lower price and takes an opportunity loss. The gold producer does not take an actual loss because of a higher spot price – it still receives the price that it contracted to receive, which should have been high enough when it entered into the forward contract. So, even if the gold price were to go to US$2,000/oz, gold producers would experience only opportunity losses rather than any actual loss.

UBS 65

Mining and Steel Primer 18 May 2011 Q

This transaction results in large credit risks. The bullion bank has the risk that the gold producer will not deliver the gold. The central bank has the risk that the bullion bank will not return its gold at the end of the contract. Consequently, bullion-banking operations tend to be undertaken by highly rated commercial banks, minimising the central bank’s credit risk. Similarly, bullion banks often require that their producer clients restrict their hedging operations to a maximum percentage of ore reserves and/or a maximum multiple of years of production.

Spot-deferred forwards A deferred forward is a forward contract without a pre-defined delivery date. While the pricing of a plain forward will be based on the known gold swap rate to maturity, the deferred forward will be calculated on a rolling basis using the shorter-date requested by the client. These rates can be of varying tenors, from overnight to one year or longer. As each shorter-dated forward matures, it is rolled over for a further period; therefore, no settlement is required until the customer’s chosen maturity date. Using deferred forwards introduces an extra element of market risk. Since the final maturity date is unknown, it is not possible to fix the interest components until maturity. This gives rise to an exposure to floating dollar and gold lease interest rates. Often, such instruments are used by producers who believe that dollar interest rates are expected to rise in the future. The producer will roll spot sales on a deferred (floating) basis until dollar rates have risen, giving the producer a more attractive contango (swap rate) to lock in until maturity.

Lease rate exposure In a similar way to the spot-deferred example, producers can also initiate trades to take advantage of movements in gold lease rates or to exploit the shape of the gold lease rate curve. For example, if a producer wants to sell forward gold for five years, but the treasurer thinks that the cost of borrowing gold for five years is high, the producer can decide that it would rather pay ‘floating gold’ for the duration of the five-year trade. Each quarter, the producer borrows gold for three months in the market. Because three-month gold interest rates are almost always lower than five-year gold interest rates, this trade has historically paid off – the cost of borrowing gold by the producer has been lower if he floats his gold lease rate (ie, borrows in the short term to fund a longer-term requirement). It does, however, introduce risk into the trade; past behaviour is no guarantee of future performance.

Options While vanilla forwards are simple, they do not allow much flexibility. The use of options allows more flexible strategies to be constructed, in some cases for no cost and no extra risk. While in certain cases, options can add tremendous risk to producers or consumers, depending on the strategy, options have less risk than the vanilla forwards do.

UBS 66

Mining and Steel Primer 18 May 2011

Copper

Key facts

Copper supply Chart: Copper mine production by region, 2010 Common ore minerals: North China Asia (ExNative copper (Cu) America 8% China) bornite (Cu5FeS4; 63% Cu), chalcocite (Cu2S; 80% Cu), 10% 7% covellite (CuS; 67% Cu), chalcopyrite (CuFeS2; 35% Cu), Latam malachite 10% CIS Major mining/ production operations 7% Codelco, Freeport McMoran, BHP Bilitton produce c4200ktpa Chile

Next 5 14%

Source: Brookhunt, UBS estimates

Consumer products 8%

Other 2% Transport Equip't 13%

China 37%

Europe 21%

Average

BHP Bilitton

Freeport McMoran

Codelco

Others 50%

Chart: End uses of copper

Building Cons'tion 33%

Industrial Machinery 13%

Asia (ExChina) 25%

Processing Credits Royalties

Xstrata plc 5% Rio Tinto 4%

Chart: Geographic consumption of copper 2010 Latam North 5% America 10%

Source: AME, UBS estimates

BHP Bilitton 7%

Codelco 11%

Source: Brookhunt, UBS estimates

200 USc/lb 150 100 50 0 -50 -100

Mining Admin & Support Offisite

Freeport McMoran 9%

Other 26%

34%

Chart: Copper mine cash costs

Chart: Major copper producers 2010

Power 33%

Source: Brookhunt, UBS estimates

Source: Brookhunt, UBS estimates

Demand Chart: World copper consumption

History of copper - The discovery of copper dates back to prehistoric times, there are reports of copper use dating back to 9000 BC in Iraq. Harder copper alloys, such as bronze, superceded it to make tools by 3000 BC. - Copper’s properties of electrical and heat conduction make it attractive for use in electrical wiring applications as well as for home heating systems. Its malleability and resistance to corrosion make it useful for use in water pipes.The high tech boom of the late-1990s stimulated demand, swinging the copper market from surplus in 1996-99 to deficit in 2000. - China’s emergence as a major consumer of copper (most of which is imported) is now the major swing factor in the copper market, as is the issue of how fast supply additions can come into the market.However this growth looks to be slowing and the effects of substitution in some end uses of nickel, coupled with higher production, are likely to be seen in less favourable supply/demand balances. - Open pits produce around 70% of mined copper and the world’s top five copper mines are all open pit. -Often "waste" copper may be further treated by leaching (the SX-EW method). Some mines may report revenue net of treatment/refining charges (TC/RCs). On average copper mine grades have been decreasing at 1.3% per annum since 1990.

20000 Kt

18000 16000 14000 12000 10000

2010

2006

2002

1998

1994

1990

1986

1982

8000

Source: Brookhunt, UBS estimates Pricing and inventories

10,100

LME copper, US$/Mt LHS

8,100 6,100

LME copper stocks, Mt RHS

4,100 2,100

Source: Datastream, UBS estimates

0 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

100

1,200 60 1,000 50 40 800 30 600 20 400 10 200 0

Source: Datastream

EBIT margin 2011E

Xstrata

12,100

Chart: Profitability and returns of key producers

BHP Bilitton

LME copper US$/Mt

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012E

10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000

Chart: Pricing and inventories

Freeport McMoran

Chart: Long term pricing trends

ROIC 2011E

Source: UBS estimates

Key issues - Demand growth over 2010-15 to be dominated by China with key support from the -Key supply drivers: Suply disruptions and project delays, labour contract renewals for CIS, Eastern Europe, and ex- China Asia. mines constituting 7% of global supply are to be renewed in 2011. - Water constraints also to affect supply from Latin America

UBS 67

Mining and Steel Primer 18 May 2011

Aluminium

Key facts

Aluminium supply Common ore minerals: Bauxite (Al2O3) Nepheline (Russia; (Na,K)AlSiO4)

Chart: Aluminium production by region, 2010 North America 11%

Source: Brookhunt, UBS estimates

Source: Brookhunt, UBS estimates Chart: End uses of aluminium

Power

Average

Alcoa

Rio Tinto

UC Rusal Alumina

Labour

Annodes

Others 52%

Chart: Geographic consumption of aluminium 2010 E Europe 4%

Other 4%

Consumer Durables Machinery & 4%

Other 3%

North America 13%

0

Chalco 7%

Next 5 11%

Latam 4%

500

Alcoa 8%

Norsk Hydro 3%

Other 21%

1500 1000

Rio Tinto 9%

Latam 5%

China 41%

US$/Mt

2000

UC Rusal 10%

Middle East 6% W Europe 6%

Major mining/ production operations US Rusal, Rio Tinto and Alcoa contribute to around 28% of the total world's production UC Rusal has an output of c4100ktpa

Chart: Aluminium production costs

CIS 10%

Chart: Major producers of aluminium 2010

E'ment 4% Electrical 8%

China 41%

Transport 42%

W Europe 15%

Other

Source: AME, UBS estimates

Cons'tion 13%

Asia (ExChina) 20%

Source: Brookhunt, UBS estimates

Packaging 25%

Source: Brookhunt, UBS estimates

Demand Chart: World aluminium consumption,

History of aluminium

45 mt

40 35 30 25 20 15

2008

2004

2000

1996

1992

1988

1984

1980

10

- Aluminium was discovered in 1808, but was not produced commercially until 1854. - In 1886 the Hall-Héroult process was invented which is the basis for aluminium production today. -Aluminium is manufactured by passing an electric current through dissolved alumina. - In 1889 Freidrich Bayer invented the Bayer Process for large-scale manufacture of alumina from bauxite. - In 1999 consolidation in the industry really began in earnest, with Alcan merging with Algroup and Alcoa acquiring Reynolds. With the emergence of Russky Aluminy (RusAl) in 2000 consolidating major Russian smelter interests, Pechiney was consigned to the second division of producers. - It had been hoped that this consolidation would give producers pricing power and help to keep prices steady, but the emergence of China as a major producer in the late 1990s, and its subsequent move from a net importer to a net exporter of aluminium, has led to price weakness. One tonne of alumina normally requires two to three tonnes of bauxite. Two tonnes of alumina are required to produce one tonne of aluminium. Aluminium is smelted in graphite-lined steel containers known as "pots". Smelting is energy intensive, so most smelters are located in areas with a plentiful supply of cheap power. Aluminium smelting can use up to 15MWh per tonne of metal produced.

Source: Brookhunt, UBS estimates Pricing and inventories

LME aluminium, US$/Mt LHS

3,500 3,000 2,500 2,000 1,500 1,000 500 0

2,500 LME aluminium stocks, Mt RHS

2,000 1,500 1,000 500

Source: Datastream, UBS estimates

Source: Datastream

Key Issues - Concerns over higher energy costs and the potential for idling or decommissioning of less energy efficient China-based capacity. - Demand to be driven primarily by China (auto., housing & infra)

Jan-11

Jan-09

Jan-07

Jan-05

Jan-03

Jan-01

Jan-99

Jan-97

0

50 40 30 20 10 0 EBIT margin 2011E

Alcoa

3,000

Chart: Profitability and returns of key producers

Rio Tinto

LME aluminium, US$/Mt

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012E

2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000

Chart: Pricing and inventories

UC Rusal

Chart: Long term pricing trends

ROIC 2011E

Source: UBS estimates - Currently over c3Mt of aluminium is under carry trade deals,and this may be made available to market asroll off of carry-trade deals take splace - Key supply drivers:Greater output from China, India, Russia and Abu Dhabi

UBS 68

Mining and Steel Primer 18 May 2011

Zinc

Key facts

Zinc supply Common ore minerals: Sphalerite (ZnS; 41-67% zinc)

Chart: Zinc mine production by region, 2010

C&S America 19%

Major mining/ production operations Xstrata is the highest producer with about 1100Ktpa Hindustan Zinc and Minmetals produce around 700Ktpa

China 27% Europe 7%

Next 5 13%

Others 57%

Source: Brookhunt, UBS estimates

Average

Vedanta

Teck Resources

Xstrata

Asia(ExChina) 9% CIS 7%

CIS 2%

Other 1%

China 41% Infrast're 14% Construction 50%

Transport 22%

Asia(ExChina) 23%

Procesing Credits

Consumer Products 7%

Industrial Machinery 7%

Europe 18%

Source: AME, UBS estimates

Glencore 4%

Chart: End uses of zinc

America 11%

Mining Admin & Support Royalties

Xstrata AG 9%

Source: Brookhunt, UBS estimates

C&S America North 4%

Teck Resource 5%

Minmetals 6%

Chart: Geographic consumption of zinc 2010

USc/lb

100 50 0 -50 -100

Hindustan Zinc 6%

Australia 12%

Other 2%

Chart: Zinc production costs

Chart: Major producers of zinc conc 2010

North America 17%

Source: Brookhunt, UBS estimates

Source: Brookhunt, UBS estimates

Demand Chart: World zinc consumption and production 14500 12500 10500 8500 6500 4500 2500 500

History of zinc

Consumption

2010

2006

2002

1998

1994

1990

Kt

Production

- Zinc has been used in the form of alloys for more than 2000 years. The first evidence of zinc smelting technology is in the form of seventh century Chinese coins and mirrors. - The first large-scale production of zinc was undertaken in India in the fourteenth century and China in the 1600s. The export trade to Europe from Asia flourished during the seventeenth and eighteenth centuries. - Large scale commercial smelting began in Europe in the early-1800s and in the US in the 1850s. - Development of the froth flotation process in the 2oth century enabled recovery from more complex ores in the US, making higher grade concentrates. This allowed the US to attain its position as the major global zinc producer. In 1971, Japan surpassed the US as the world’s largest zinc metal producer but in 1993 China overtook Japan. Undisciplined production by Chinese producers in recent years has led to a crash in the zinc price, although the consumption rise in China may represent an inflection point. - Zinc often occurs in association with lead in ore deposits. 85% of WW zinc is mined in association with lead. Zinc sulphide ore is concentrated by a process called flotation. - Zinc may be refined using smelting or an electrolytic process (80% of zinc metal refining is carried out using one of these methods). China has swung from being a net exporter to net importer of zinc

Source: Brookhunt, UBS estimates Pricing and inventories

5,500

LME zinc, US$/Mt LHS

4,500

2,500

3,500

2,000

LME zinc stocks, Mt RHS

2,500

1,500

1,500

1,000

500 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012E

500

Source: Datastream, UBS estimates

Source: Datastream

800 700 600 500 400 300 200 100 0

50 40 30 20 10 0

EBIT margin 2011E

Vedanta

LME zinc, US$/Mt

Chart: Profitability and returns of key producers

Teck Resources

3,000

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

3,500

Chart: Pricing and inventories

Xstrata

Chart: Long term pricing trends

ROIC 2011E

Source: UBS estimates

Key issues - Global zinc demand growth in 2011 to be driven by China, India, Brazil. Demand - Supply could be constrained on accoount of several zinc mines closures as reserves growth over 2010-15 to be dominated by China, E Eur and ex-China Asia become depleted (By 2016, 1.9mt capacity could be closed while only 800kt capacity from new projects would be added).concentrate.

UBS 69

Mining and Steel Primer 18 May 2011

Lead

Key facts

Lead supply Common ore minerals:

Chart: Refined Lead production by region, 2010 North America 17%

Galena (PbS; 87% Pb) is the major ore mineral Minerals such as cerussite (PbCO3; 77% Pb), anglesite (PbSO4; 68% Pb) and wulfenite (PbMoO4; 56% Pb) occur where galena has been weathered

Major mining/ production operations Xstrata, BHP Billiton produces about 250Ktpa Doe Run has a production of about 190ktpa

Next 5 9%

CIS 2%

Others 68%

Source: Brookhunt, UBS estimates

Source: Brookhunt, UBS estimates

Chart: Geographic consumption of lead 2010

Chart: End uses of lead

Latam 5%

200

Other 1%

Asia (ExChina) 16%

0 -200 -400

Alloys 3% Rolled & Extruded Products 4%

China 44%

North America 16%

Average

Doe Run

Teck Resource 3% Hindustan Zinc 3%

Latam 5%

USc/lb

BHP Bilitton

Doe Run 5%

Xstrata 6%

Oceania 14%

China 43%

Chart: Lead production costs

Xstrata

BHP Billiton 6%

Europe 15%

Other 4%

400

Chart: Major producers of lead conc 2010

Procesing

Support

Credits

Offsite

Royalties

Source: AME, UBS estimates

Other 8%

Pigments & Other Comp'nds 8%

Europe 18%

Mining

Cable sheating 2%

Source: Brookhunt, UBS estimates

Batteries 75%

Source: Brookhunt, UBS estimates

Demand Chart: World lead consumption and production 9500 8500 7500 6500 5500 4500 3500 2500

History of lead

Consumption

2009

2005

2001

1997

1993

1989

1985

1981

Kt

- Lead is one of the oldest metals known to man, with a history dating back to 5000 BC. It is known to have been used by the Egyptians in 4000 BC and by the Chinese to mint coins in 3000 BC. Mines throughout Europe were worked from 2300 BC, including the still-operating Rio Tinto mine in Spain. - By 100 BC, lead water pipes and barrel hoops were ubiquitous throughout the Roman Empire. In medieval times, lead was used as a construction material, and by the 1400s was used as ammunition. - Consumption remained low until the mid-1800s when production increased to cater for cable sheathing and containers for storing corrosive materials. This extra demand resulted in the discovery of the Missouri Lead Belt in 1867 and the Broken Hill orebody in Australia in 1883. - In recent years, lead has been used extensively in batteries, although many commentators believe usage in this area will fall off. At present, the market is in balance, but more production capacity needs to be added to prevent prices spiking.There are still few potential production projects in the pipeline, except in China and continued supply tightness is likely to lead to further price breakouts.- In recent years, the source of lead production has changed from primary to scrap sources to some extent. This is likely to continue if no new production capacity is added. - In recent years, the source of lead production has changed from primary to scrap sources to some extent. This is likely to continue if no new production capacity is added.

Production

Source: Brookhunt Pricing and inventories

1,500 1,000 500 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012E

0

Source: Datastream, UBS estimates

LME Lead, US$/Mt LHS

LME lead stocks, Kt RHS

Source: Datastream

350 300 250 200 150 100 50 0

60 50 40 30 20 10 0

EBIT margin 2011E

Teck Resources

2,000

4,300 3,800 3,300 2,800 2,300 1,800 1,300 800 300

BHP Bilitton

2,500

LME lead, US$/Mt

Chart: Profitability and returns of key producers

Xstrata

3,000

Chart: Pricing and inventories

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Chart: Long term pricing trends

ROIC 2011E

Source: UBS estimates

Key issues Global demand growth in 2011 to be driven by 9.5% growth in China, and strong - Mine closures (because of reserves depletion) to constrain supply: By 2016, capacity growth in lead-acid batteries (~80% of total lead consumption) driven by robust output of closures 0.5mt and new projects 150kt, Chinese domestic lead supply to lag demand cars, ebikes, motorbikes

UBS 70

Mining and Steel Primer 18 May 2011

Nickel

Key facts

Nickel supply Common ore minerals: Pentlandite ((Fe,Ni)9S8; 35% Ni) Also less common nickel sulphides and arsenides

Chart: Nickel mine production by region, 2010 Asia (ExChina) 19%

Major mining/ production operations Norilsk Nickel's operation is one of the world's largest with an output of over 180Ktpa Soroaka, Antam and Jinchuan together produce close to 250Ktpa

Chart: Nickel production costs

Norilsk 13%

CIS 17%

Oceania 20%

Americas 20%

Source: Brookhunt, UBS estimates

Source: Brookhunt, UBS estimates Chart: First uses of nickel

CIS 2%

Foundary 3%

Depreciation

Average

Jinchuan

Norilsk Kola MMC

Credits

Other 7%

Alloy Steel 5%

China 34%

Plating 7%

Europe 24%

N-F Alloys 12%

Refining

Stainless Steel 66%

Asia (ExChina) 26%

Source: AME, UBS estimates

Jinchuan 5%

Next 5 14%

Others 53%

Chart: Geographic consumption of nickel 2010

Americas 12%

Smelting

Antam 5%

SLN in house mines 4%

Other 17%

Africa 2%

Mining

Soroaka 6%

China 7%

US$/lb

Norilsk Polar

5 4 3 2 1 0 -1

Chart: Major producers of nickel 2010

Source: Brookhunt, UBS estimates

Source: Brookhunt, UBS estimates

Demand Chart: World nickel consumption

History of nickel

1600 Kt

1500 1400 1300 1200 1100 1000

2010

2008

2006

2004

2002

2000

1998

1996

900

- Nickel was discovered in 1751 by Baron Axel Frederik Cronstedt in a mineral called niccolite. - As recently as 100 years ago nickel was still considered a worthless variety of copper! - Since that , Nickel has found uses as an anti-corrosive covering in steel and as a component of alloys. - Demand for nickel really started to take off from the 1960s onwards as it became an important component of the growing stainless steel business. Since the early-1990s consumption has nearly doubled. - In the late-1990s Australian producers, predominantly, proposed laterite deposits as the future of nickel production. So far operating issues have limited the productivity of these deposits. - China has grown to be a major consumer of nickel (predominantly for stainless steel) in recent years. However this growth looks to be slowing and the effects of substitution in some end uses of nickel, coupled with higher production, are likely to be seen in less favourable supply/demand balances. -There are 2 major types of economic nickel deposits, sulphides and laterites. Sulphides have been the major source of nickel (eg Norilsk, Sudbury), but laterite deposits are of growing importance (eg Goro). - Laterite deposits are generally of higher cost to operate than sulphide deposits due to the different mineralogy and different nickel extraction techniques.

Source: Brookhunt, UBS estimates Pricing and inventories

43,000 33,000

LME nickel stocks, Mt RHS

23,000 13,000

Source: Datastream, UBS estimates

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

3,000

Source: Datastream, UBS estimates

180 160 140 120 100 80 60 40 20 0

80 70 60 50 40 30 20 10 0

EBIT margin 2011E

BHP Billiton

LME nickel, US$/Mt LHS

Vale

53,000

Chart: Profitability and returns of key producers

Antam

LME nickel, US$/Mt

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012E

41,000 36,000 31,000 26,000 21,000 16,000 11,000 6,000 1,000

Chart: Pricing and inventories

Norilsk

Chart: Long term pricing trends

ROIC 2011E

Source: UBS estimates

Key issues - Demand growth over 2010-15 to be dominated by China with key support from the - Large tonnes addtions in 2011 from key mining projects and China's well functioning CIS, Eastern Europe, and ex- China Asia. NPI capacity (provides nickel's alternative as stainless steel raw material and lowers cost by using rotary kilns) are bears on supply side.

UBS 71

Mining and Steel Primer 18 May 2011

Uranium

Key facts

Uranium supply Common ore minerals: Uraninite (combined UO2 and UO3; 50-85 % U3U8)

Chart: Uranium mine production by region, 2010 Aust 13%

Africa 17%

Pitchblende (combined UO2 and UU3; 50-80% U3U8)

Chart: Major producers of uranium 2011E

Ukraine 2%

Others 24%

Davidite (rare earth-iron-titanium oxide; 7-10 % U3O8) Major mining/ production operations Kazatomprom produced 24KtU in 2010 Cameco's McArthur River produced 19KtU in 2010 KazAtomProm's ISL mining group produced 18KtU in 2010 Energy Resources's Ranger produced 8.6KtU in 2010

Chart: Mine and Secondary supply, mn lbs 250

Secondary supply Mine Supply

200

Uranium One 9%

Source: UBS estimates

Chart: Region consumption of uranium 2010

Chart: End uses of uranium

India 2%

Areva NC 8%

Priarguns ky 6%

Source: UBS estimates

China 3%

KazAtom 19%

BHP 6%

Canada 18%

US 3%

Other 8%

South Korea 6%

150

Russia 7%

Kazakh 32%

Cameco 22%

Others 5%

Rössing 6%

Other 8%

Japan 13%

100 50

Europe 44%

North Am 27%

Power 92%

2010

2009

2008

2007

2006

2005

2004

2003

0

Source: WNA, UBS estimates

Source: UBS estimates

Source: AME, UBS estimates

Demand Chart: World uranium consumption

History of uranium

220 mn lbs 200 180 160

2010

2009

2008

2007

2006

2005

2004

2003

140

-Uranium is the heaviest element found on Earth—that is, the element with the highest atomic number and atomic weight. It has held that distinction ever since it was first recognized as an element by the German chemist Martin H. Klaproth in 1789, who named it uranium in honor of the new planet that had recently been discovered: Uranus. Discovery that uranium was radioactive came only in 1896 by accident when Henri Becquerel in Paris found that a sample of uranium left in a drawer on top of an unexposed piece of photographic plate caused the plate to become "fogged," as if it had been partly exposed to light. From that he deduced that uranium was emitting invisible rays. -When nuclear fission was discovered in 1938, uranium became the most fateful element in the periodic table. -Because of its ability to undergo nuclear fission with the release of huge amounts of energy, it became a brand-new source of power, which people would use for both peaceful and destructive purposes. -In spite of its radioactivity, uranium has a few useful applications because it is so heavy. -The key feature of uranium supply is the 28% of total supply coming from secondary or recycled sources (mainly from Russia). This is expected to decline significantly after 2013-14.

Source: UBS estimates Pricing and inventories Chart: Uranium mine supply and demand in mn lbs

Source: WNA, UBS estimates

Source: WNA, UBS estimates

Key issues - Japan consumes 14% of the global uranium oxide per year and 20% of Japan's capacity was down because of earthquake

EBIT margin 2011

BHP

ERA

Cameco

2010

2009

2003

2009

2007

2005

2003

2001

1999

150 1997

160

0 1995

170

20 1993

40

1991

180

1989

60

1987

190

2008

200

80

Chart: Profitability and returns of key producers 60 50 40 30 20 10 0

Demand

2006

100

Total supply

2005

US$/lb

2007

210

120

2004

Chart: Pricing trends

ROIC 2011

Source: WNA, UBS estimates - Kazakhstan (world’s largest uranium producer with c33% of global mine supply, 2011e) is nearing end of its sharp supply expansion; one large lift (15% y/y) in 2011e, then 2-6%/y thereafter

UBS 72

Mining and Steel Primer 18 May 2011

Coking Coal

Key facts Chart: Coking Coal traded supply, 2010 Oceania 59%

N America 27%

Asia 5%

Africa 1%

Next 5 16%

Source: AME, UBS estimates

Chart: coking coal traded demand 2010

Chart: Coking coal consumption and pricing

Asia 61%

Source: AME, UBS estimates

Consumption (LHS)

300 250 200 150 100 50 0

2009

Sth & Ctrl. America 7%

Rio Tinto 5%

US$/t

2007

300 250 200 150 100 50 0 Mt

Africa 2%

2005

Nrth America 2%

EU-25* 23%

Source: AME, UBS estimates

Others 42%

2003

Average Cost

Mechel OAO

Kokan Kogyo ( Aust) Pty Ltd

Itochu Corp

Peabody

Xstrata plc

Processing Freight & port costs

Anglo Am. 6%

Source: AME, UBS estimates

CIS 5%

Mining Admin & support Royalties

Teck 8%

2011E

S America 2%

US$/t

90 60 30 0

Mitsubishi 10%

BHP 13%

EU 6%

Major mining/production operations BHP Billiton is the major producer of export coking coal contributing to over 13% of the world's share After BHP, Mitsubishi has a share of 10%

Chart: Hard Coking Coal export costs

Chart: Major producers of export coking coal 2010

2001

Coking Coal Properties Hardness and ability to swell (supports structure of blast furnace); good coking characteristics (ie strength under high temperature conditions).

HCC Prices (RHS)

Source: AME, UBS estimates

Demand Chart: World coking coal consumption 290 270 250 230 210 190 170 150

Key Technical Facts - Coal is a carbonaceous rock that forms when organic material (decomposing plant life) is compressed at great depth in the Earth's crust. - Coal is classified into different types, depending on its carbon, ash and sulphur contents. As the coal is compressed, chemical and physical reactions cause the concentration of these key components. - Anthracite is the highest quality coal; it has the greatest calorific value (gives out most heat when burnt), low moisture content, lowest percentage of volatiles and highest carbon content (92-94%). Other grades in order of decreasing quality are: semi anthracite, semi-bituminous, sub-bituminous and lignite. - Hard coking coal sells at a premium because of its physical properties that also the production of a hard coking coal that can support the charge in the blast furnance. 2011E

2009

2007

2005

2003

2001

Mt

Source: AME, UBS estimates Chart: Coking coal demand split in mt

Source: UBS estimates

Source: AME, UBS estimates

Key issues - Significant driver for demand (trade) in 2011-12 would be the post quake reconstruction demand (for steel) from Japan as it is unlikely to be met from domestic steel production capacity.

EBIT margin 2011E

Anglo Amrcn

Teck

Mitsubishi

2011E

2010

BHP Billiton

60 50 40 30 20 10 0

2009

0 2008

50

0

Chart: Profitability and returns of key producers

mt

2007

100

50

PCI Semi soft Hard coking

2005

150

100

2011E

200

150

2009

200

2007

250

2005

250

2003

300

2001

300

2006

Chart: HCC Contract prices US$/t

ROIC 2011E

Source: UBS estimates - Total met-coal supply in 2011 is forecast to fall 4% (vs -1.4%, 19-Jan 2011 forecast): this is entirely attributable to Queensland’s floods, c15mt of met coal products lost tot trade because of the floods.

UBS 73

Mining and Steel Primer 18 May 2011

Steaming Coal

Key facts

Steaming coal Properties: Coal practically devoid of coking properties; description covers all coal not specifically designated as coking coal.

Chart: Steaming Coal traded supply 2010 Oceania 21% Asia 41%

Major mining/production operations Xstrata Coal is the major Producer holding around 7% of the total production PT Bumi has a share of about 6%

Steaming Coal production costs

Anglo Am 5%

Xstrata plc 7%

Africa 10% Ctrl & Sth Am 9%

Others 3%

Adaro 5%

Bumi 6%

Eur 16%

BHP Bltn 4%

Others 58%

Next 5 15%

Source: AME, UBS estimates

Source: AME, UBS estimates

Chart: Steaming Coal traded demand, 2010

Chart: Steaming coal consumption and pricing

US$/t

150

Middle East 2%

Sth & Ctrl Am 2%

600 Others 1%

2009

2007

2005

2011E

Asia 68%

2003

0 2001

0

Europe 21%

Source: AME, UBS estimates

50

US$/t

200 1997

Processing Freight & port costs

100

Mt

400

1999

Nrth America 6%

Average Cost

Adaro

Afr. Rainbow Min.

Mining Admin & support Royalties

Yanzhou Coal

800

Bukit

Chn. Shenhua

80 60 40 20 0

Chart: Major producers of export Steaming Coal2010*

Consumption (LHS) Export TC JFY contract price (RHS)

Source: AME, UBS estimates

Source: AME, UBS estimates

Demand Chart: Steaming Coal consumption 800 700 600 500 400 300 200 100 0

2011E

2009

2007

2005

2003

2001

1999

1997

Mt

Key Technical Facts - Coal is a carbonaceous rock that forms when organic material (decomposing plant life) is compressed at great depth in the Earth's crust. - Coal is classified into different types, depending on its carbon, ash and sulphur contents. As the coal is compressed, chemical and physical reactions cause the concentration of these key components. - Anthracite is the highest quality coal; it has the greatest calorific value (gives out most heat when burnt), low moisture content, lowest percentage of volatiles and highest carbon content (92-94%). Other grades in order of decreasing quality are: semi anthracite, semi-bituminous, sub-bituminous and lignite. - Steaming or thermal coal is priced according to its calorific content generally measured as Kcalories/kg with standard levels being 6500kcal/kg; US Powder River thermal coal is example of much lower thermal content but with equally low operating costs - China and India dominate coal consumption with 70% of all China's energy in coal while India's energy is contributed by 70% coal.

Source: AME, UBS estimates Chart: Thermal coal exporters (mt)

Source: Tex Report

800 700 600 500 400 300 200 100 0

Chart: Profitability and returns of key producers

Indonesia

Australia

South Africa

Colombia

100 80 60 40 20

Source: AME, UBS estimates

EBIT margin 2011E

PT Bumi

Anglo America

BHP Billiton

Xstrata Coal

2011e

2010

2009

2008

2007

0

2006

2011E

2009

2007

2005

2003

2001

1999

1997

1995

1993

140 120 100 80 60 40 20 0

2005

Chart: Thermal coal contract US$/t

ROIC 2011E

Source: UBS estimates

Key issues - Demand side: China overtook Korea and Taiwan in last 1.5 years to become world's second largets importer, china alongwith India (demand expected to grow +95 over next 5 years) are dominnat drivers.

- Supply side: Main worries in 2011 were excessive and prolonged wet seasons in indonesia, Australia and Colombo (together c70% of global trade)

UBS 74

Mining and Steel Primer 18 May 2011

Iron Ore

Key facts

Iron Ore supply Chart: Iron Ore supply by region, 2010E Common ore minerals: China Haematite (Fe2O3; 70% Fe), magnetite (Fe3O4; 72% Fe), 17% siderite (FeCO3; 48% Fe). Brazil 22%

BHP Billiton 7%

CIS 11%

India 11% Australia 24%

Chart: Iron Ore production costs

Cleveland Cliffs 2%

Others 15%

Others 56%

Next 5 3%

Source: AME, UBS estimates

Source: AME, UBS estimates

Chart: Geographic demand of iron ore2010E

Chart: Global seaborne trade in iron ore 2010E

US$/t

30

Rio Tinto 13%

Vale 17%

Kumba 2%

Major mining/ production operations Vale is the biggest producer in the world with 306 ktpa of iron ore production in 2010e RioTinto is the next largest producer with assets in Australia and Canada

40

Chart: Major producers of iron ore 2010E

CIS 8%

20

Vale 26%

Africa & Middle East 4%

Others 38%

Europe 11%

10

Processing

Average

BHPBYandi

Rio Yandic

Vale Carajas Mining

Royalties

China 49%

Americas 9% Asia ex China 19%

0

Rio Tinto 23% BHP Biliton 13%

Transport & Ports

Source: Metallytics, UBS estimates

Source: AME, UBS estimates

Source: AME, UBS estimates

Demand Chart: World iron ore consumption

History of iron ore - The earliest iron implements date from about 3000 BC and iron ornaments date from even earlier. The more advanced technique of hardening iron weapons using heat was known to the Greeks in 1000 BC. - Alloys made of wrought iron were produced up until the 14th century after which blast furnaces grew in size and steel manufacturing really took off. The process of refining molten iron with blasts of air was designed by Sir Henry Bessemer in 1855, and since then the steel making process has been larger in scale. - In recent years, the major production of iron ore has moved away from Europe and North America, towards the large scale, low cost operations of Australia, Brazil and India. - As China becomes a major importer of iron ore to feed its steel production growth, Australia’s iron ore dominate supply; Chinese interest are taking increasing equity in Australian iron ore projects - Iron ore demand is driven by crude steel production which in turn reflects industrial production. - The top three producers now account for over 63% of global seaborne trade. Production costs are falling, but freight rates are important in terms of break-even levels on some routes, and exchange rates are of increasing importance. - Iron ore demand is driven by crude steel production

1900 mt

1700 1500 1300 1100 900 700

2010E

2009

2008

2007

2006

2005

2004

2003

500

which in turn reflects industrial production. - Iron ore demand is driven by crude steel production which in turn reflects industrial production.

Source: AME, UBS estimates Pricing and inventories

2,500

100%

1,350

2,000

80%

1,500

60%

750

1,000

40%

550

500

20%

1,150

160

Source: Datastream, UBS estimates

2010E

2007

2004

2001

1998

1995

1992

1989

Steel prodn,mt (LHS)

Source: Datastream, UBS estimates

2010

2008

10

2006

2000

60

2004

Iron ore fine (JBM)

2002

950

110

Iron ore prodn,mt

Others Africa Nor. America India Brazil

0% 2010E

210

1,550

2009

Iron ore lump (JBM)

2008

260

Chart: Origin of iron ore exports, 2006-2010E

2007

Chart: World steel and Ironore production

2006

Chart: Long term pricing trends US¢/ltu

Australia

Source: AME estimates

Key issues - Demand: Short term upside on seasonal lift in Chinese domestic production, other - China's anti-inflationary government policies and ongoing programme to cut inefficient dominant drivers include CIS and Brazil. steel-producing capacity can possibly affect Chinese demand as crude steel output (main driver for iron ore demand) could decrease

UBS 75

Mining and Steel Primer 18 May 2011

Steel

Key facts

Steel supply Common ore minerals: Iron ore Steel scrap Coke

Chart: Steel production by region, 2010

Japan 14%

Major mining/production operations ArcelorMittal has by far the greatest contribution in the worlds production, with a share of about 6%.

Chart: Steel production costs

CIS 14%

Others 78% Source: SBB, Worldsteel Chart: End uses of steel Other 28%

ROW 29% China 43%

CIS 4%

100 ArcelorMittal

Average

BaoSteel

Hebei Iron and Steel Group

Other

Japan 5%

US 7%

Automotiv e 16%

Struc. Steelwor 11%

EU 27 12%

Ferrous RM

Source: AME, UBS estimates

Constn. 27%

Domes. App. 4%

0

Reductants

Next 3 7%

Source: World steel, UBS estimates

200

Angang group 3%

ArcelorMit tal 6%

ROW 39%

Chart: Geographic consumption of steel 2010

300

Labour

Baosteel 3%

Hebei I&S 3%

EU 27 23%

US$/t

400

Chart: Major producers of steel 2010

US 10%

Source: Worldsteel, UBS estimates

Mech. Engg. 14%

Source: Eurofer

Demand Chart: World steel consumption

History of steel - The Bessemer process was the first efficient steelmaking process and was invented in 1856. However, it wasn’t effective for highphosphorous iron ore. In 1878 Siemens started to build Electric Arc Furnaces which were initially used to produce high grade alloy steel, but have since been used for more and more production. In 1913 stainless steel developed, with over 12% chromium it was extremely resistant to corrosion. Hot strip mills were invented in the 1920s, followed by cold-rolling mills in the 1930s. In the 1960s Basic Oxygen Furnaces began to cut melt times from 9-10 hours to 45 minutes for high-phosphorous iron ores. In 1989, thin-slab casting increased productivity to less than 1 man hour per ton, speeding mill throughput times to 3-4 hours.The industry was extremely fragmented as steel was seen as a strategic industry by national governments. In 2000 industry consolidation widespread except in Asia - China now dominates world steel with c50% of global production and consumption - Nickel and chromium are added to make stainless steel, while vanadium, manganese and molybdenum may be added to create other alloys. 1.5t of iron ore and approx. 0.7 t of coking coal go into 1 tonne - Steel is a very regional industry, and while it is unconsolidated on a global scale, it is more consolidated from a regional perspective.

1700 mt

1500 1300 1100 900 700

2010

2005

2000

1995

1990

1985

1980

1975

1970

500

Source: AME, UBS estimates Pricing and inventories Chart: Regional production output

1.6 1.3 1

mt/day

0.7

Source:IIISI, MEPS, Metal Bulletin, UBS estimates

Source: IISI

2010

2008

2006

2004

2002

2000

1998

0.1 1996

2010

2004

1998

1992

1986

1980

1974

1968

1962

1956

1950

0.4

EBIT margin 2011E

Posco

1.9

JFE Steel

15 13 11 9 7 5 3 1 -1

EU 27 US China Pacific Rim (excl. China) Russia & Ukraine

2.2

Nippon Steel

800 700 600 500 400 300 200 100 0

Chart: Profitability and returns of key producers

Arcelor Mittal

Chart: Slab steel in US$2005/t to 2008E

ROIC 2011E

Source: UBS estimates

Key issues - China output at a record high (Mar 11-59.4Mt (c46% of the global output) is well ahead - Chinese demand to lag as tighter regulation forces commodity house constn. to of required. Supply discipline required to sustain steel price strength. of steel. weaken, no increase in exports to Japan given excess long capacity and high traders' inventoies.

UBS 76

Mining and Steel Primer 18 May 2011

Stainless Steel

Key facts Chart: Major producers of Stainless Slab, 2010

Chart: Stainless CR sheet capacity, Ktpa

20,000

Chart: End uses of Stainless Steel

Source: CRU, UBS estimates

E Eur L Amrca Oceania

2010

2008

2006

2004

2002

W Eur N Amrca Africa

2012E

Eastern Europe North America Middle East Asia

2012E

2010

2008

2006

2004

2002

2000

1998

0

2013E

2009

Catering & App. 34%

Ener. & Chem. 14% Bldng. & Constn. 17%

CIS M east Asia

Source: CRU, UBS estimates

2011E

Others 3%

Auto & Trans 12%

2000

5,000

2007

Source: CRU, UBS estimates

Chart: App Cons. of CR Flat Stainless, Ktpa

1998

10,000

2005

Source: Wood Mckenzie

25000 20000 15000 10000 5000 0

15,000

Western Europe CIS Latin America Africa

Global CR Steel Cap. Y/Y% change in CR Cap.

Global crude steel production

Chart: Shipments of CR Flat Stainless, Ktpa

2003

2009

2007

2005

2003

2001

1999

1997

1995

0

2001

10,000

1999

20,000

1997

30,000

Major production operations, 2010 TISCO Taiyuan China 3mtpa capacity, Lianzhong Stainless Steel 1.6mtpa capacity Wuxi Zhaoshun 2mtpa capacity Baosteel 1.5mpta capacity Fujian Wuhang 1.8mpta capacity

0.25 0.20 0.15 0.10 0.05 0.00

30,000 25,000 20,000 15,000 10,000 5,000 0

40,000

1995

Stainless Steel Manufactured using Steel scrap, steel Nickel, molybdenum Chromium, ferrochrome

Gen. Ind. 20%

Source: AME, UBS estimates

Demand Chart: World Stainless Steel production

History of Stainless Steel

19 97 19 99 20 01 20 03 20 05 20 07 20 09

19 95

35000 30000 25000 20000 15000 10000 5000 0

- Stainless steel was invented in 1912 by English metallurgist, Harry Brearley; the first commercial prduction was in 1913 in Sheffield. Stainless steel cutlery began to be used in 1914 based on '18/10 stainless steel', 18% chromium and 10% nickel. Stainless steel quickly found applications in industry and in architecture and in 1930 the Chrysler Building top arches were stainless steel clad. In 1935 stainless steel cars promoted the materials' unique characteristics. - Broad growth in industrial applications was driven by stainless steel's corrosion resistance, strength, temperature resistance, workability, aesthetic appeal and hygenic standards. Consumption blossomed in the 1960-70s and compounded consumption growth of 5.5% per annum has been realised since 1980. --Austenitic stainless steel is most widely used with ferrochrome at least 16% and nickel at least 7%; Ferritic stainless steel contains no nickel, but 12-17% ferrochrome- 1.5 t of iron ore and 0.7 t of coking. - 80% of stainless steel is sold as cold rolled product but 20% is sold as hot rolled product. Western Europe is still the largest region followed by the rest of Asia and China coal go into one t of steel. - 80% of stainless steel is sold as cold rolled product but 20% is sold as hot rolled product. Western Europe is still the largest region followed by the rest of Asia and China

Source: Wood Mackenzie Pricing Chart: USA CRC - Type 304 (US$/tonne)

Chart: CRC Transaction & nickel price (US$/t)

7000 6000 5000 4000 3000 2000 1000

Germany CRC surcharge - type 304 (€/t) Germany basis CRC price - type 304 (€/t) Source: MEPS, UBS

Sep-08

USA CRC surcharge - type 304 (US$/t) USA CRC basis price - type 304 (US$/t) Source: MEPS, UBS

May-10

Jan-07

Sep-03

May-05

Jan-02

800 May-00

Oct-10

Feb-09

Oct-05

Jun-07

Feb-04

Jun-02

Oct-00

Jun-97

Feb-99

Oct-95

Feb-94

500

2300

Sep-98

1500

3800

Jan-97

2500

5300

Sep-93

3500

60000 50000 40000 30000 20000 10000 0

6800

May-95

4500

Sep-93 May-95 Jan-97 Sep-98 May-00 Jan-02 Sep-03 May-05 Jan-07 Sep-08 May-10

Chart: Germany CRC - Type 304 (€/tonne)

Ger. trans CRC price -304 (€/t) USA tran CRC price (US$/t) Nickel LME (US$/t) - RHS

Source: MEPS, Metal Bulletin, UBS

Key issues - Oversupply from China (2010 output at record high of 11.3mt) has led to the gradual - On demand side, Chinese demand sluggish and lack of high end product development of global overcapacity which is suffocating the stainless steel industry, manufacturers, European demand recovered in 2010 but not as of pre-crisis levels China has doubled its output in last five years

UBS 77

Mining and Steel Primer 18 May 2011

Gold

Key facts

Gold supply Common ore minerals: Native metal (chemical symnbol: Au) Found in association with conglomerates, as shearhosted and in alluvial deposits

Chart: Gold production by region, 2010

1200 1000 800 600 400 200 0

Other 46%

AngloGold

Australia 10%

Goldfields

Newmont

Newcrest

US 9%

Goldcorp Other

Source: GFMS

Source: GFMS

Chart: Geographic consumption of gold, 2010

Chart: End uses of gold 2010 ETF 9%

India 29%

Middle East 11% USA 7%

World

Other

Sth Africa

Aust.

Lat Am

Nort Am

Source: GFMS 2008 Gold Survey

S.Africa 8%

Russia 8%

Peru 6%

Others Germany 25% 1%

US$/oz

Barrick

China 13%

Major mining/production operations Gold Fields Ltd's Driefontein operation in South Africa Freeport's Grasberg copper mine in Indonesia Newmont's Nevada Complex in US

Chart: Gold production costs key regions 2010

Chart: Major producers of gold, 2010

Coin 5% Other 6%

China 18%

Europe ex

Jewellery 53%

Bars 19%

Source: GFMS, UBS estimates

Electronics 8%

Source: GFMS, UBS estimates

Demand Chart: World gold fabrication consumption t 4000

tonnes

3500 3000 2500

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

2000

History of gold - The oldest gold objects are Egyptian, dating 5000 BC; gold began to be used as money in 3000 BC. - Gold rush in California in 1849; gold discovered in Australia in 1850 and in South Africa in 1886. - 1887: gold extraction using cyanide is discovered. - 1896: last gold rush of the nineteenth century with gold discovery in the Klondike river, Canada. - 1944: Bretton Woods agreement sets international gold exchange standard, IMF and World Bank. - 1961: modern-day mining began in Nevada's Carlin trend, making it the US's largest gold mining state. - 1973: US dollar is removed from the gold standard and gold prices are allowed to float free. It reaches a US$120 per ounce peak. - 2008: gold peaks at $1035/oz, finally succumbing the prior high of $850/oz from January 1980. - 2010: Gold makes new high in 2010/11 and recently crossed US$1500 per ounce in Apr-11. - 2011: Gold touches fresh record of $1577.57 on 02 May

Source: GFMS, UBS estimates Pricing and inventories Chart: Profitability and returns of key producers

1,250

1200

20

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: Thomson Datastream, UBS estimates

Net long position Moz

Source: CFTC, Bloomberg, UBS

Mar-11

250

Jan-10

Jan-06

400 Aug-10

0

450

Jun-09

650

800

Apr-08

10 Nov-08

850

Feb-07

1,050

Price-US$/oz (RHS)

EBIT margin

ROIC

GoldFields

30

60 50 40 30 20 10 0

Anglogold

1600

40

Newmont

Average AM fix, US$/oz

Sep-07

1,450

Aug-06

1,650

Chart: Pricing and COTR

Barrick

Chart: Long term pricing trends

Source: UBS estimates

Key issues Drivers: End of QE2, geopolitical risk,rising inflation expectations,decent physical - In 2011, geopolitical risks have been a significant determinant of investor appetite for demand,constrained scrap supply,continuing central bank buying, future course of US gold, and the uncertainty that stems from the unrest in the Middle East has without doubt induced a premium into the gold price monetary policy;escalation of EU debt problems

UBS 78

Mining and Steel Primer 18 May 2011

Silver

Key facts

Silver supply Common ore minerals: Native metal (chemical symnbol: Ag) Occurs naturally as an alloy with Gold and other minerals (argentite and chlorargyrite), mostly produced as byproduct of copper, gold, lead and zinc. Major mining/production operations Cannington (Aust) followed by Fresnilo mine (Mexico) were leading primary silver mines, BHP (42.3moz) and KGHM (38.4moz) were the top two producers in 2008.

Chart: Silver supply, 2010

Chart: Silver fabrication demand, 2010

Source: GFMS

Source: GFMS

Chart: Global IP and Ind App in silver demand

Chart: Silver scrap supply and prices

Chart: Gold:Silver ratio

Mine prodn 70%

Hedging 6%

Coins & medals 12%

Scrap 20%

Jewellery 19%

Source: UBS

40

Source: GFMS, UBS estimates

Jan-11

May-11

Sep-10

May-10

30

2009

2007

2005

2003

2001

1995

Global IP Share of Ind App in total demand

0 1999

0

50

Jan-10

50 1997

2010

2009

2008

2007

2006

2005

5

60

Sep-09

10

100

70

May-09

150

80

Sep-08

15

May-08

200

Ind App. 55%

90

Jan-08

20

250

45% 35% 25% 15% 5% -5% -15% -25%

Silverware 6%

Photography 8%

Jan-09

Gov't sales 4%

Source: Bloomberg, UBS

Demand Chart:Total silver fabrication demand

History of Silver

900 850 800 750

2010

2008

2006

2004

2002

2000

1998

1996

700

- First sophisticated processing was attributed to Chaldeans (2500 BC) using cupellation process. -1492: Discovery of the "New World" led to expanded silver production, particularly in the development of mercury amalgamation process . - Between 1500 to 1800: Bolivia, Peru & Mexico accounted for c85% or world production and trade. - After 1850: U.S increased production with discovery of Comstock Lode (Nevada) along with other countries, production grew from 40 to 80 moz by 1870. - 1876 to 1920: Production in 1900 reached 120 moz annually., major discoveries in U.S (Nevada, Colorado & Utah), Aust, Ctrl America and Europe. 1920 saw 50% expansion in production to 190moz annually. - Post 1920: Variety of advances (bulk mining methods, improved ore separation and electrorefining tech.) led to increasing output of refined silver. A relatively small percentage of silver production comes from primary mines whereas the lions share comes as a by product of the base metals, therefore rising silver prices may not have much relevance for its mine output. -1980: Silver peaked at US$49.45/oz on 18 January, subsequently collapsing to a low of US$10.80/oz in the next four months as scrap supply surged to a high of 302 moz. - Silver has highest electrical and thermal conductivity

Source: GFMS, UBS estimates Pricing and inventories

Source: Bloomberg

Source: CFTC, Bloomberg, UBS

EBIT margin 2011E

Silver Standard

Silvercorp metals

80 70 60 50 40 30 20 10 0 Pan American

Mar-11

Net long position Moz Price-US$/oz (RHS)

Aug-10

Jan-10

Jun-09

Apr-08

Nov-08

Sep-07

48 40 32 24 16 8 Feb-07

Price-US$/oz (RHS) ETF holding (moz)

Chart: Profitability and returns of key producers

500 400 300 200 100 0 Aug-06

60 50 40 30 20 10 0 Oct-06 Feb-07 Jun-07 Oct-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Apr-10 Aug-10 Dec-10 Apr-11

600 500 400 300 200 100 0

Chart: Pricing and COTR

Jan-06

Chart: ETF holding and price

ROIC 2011E

Source: UBS estimates

Key issues - Silver remains the best performing precious metal so far in 2011, despite the sharp correction in May. Volatility is expected to stay elevated over the coming months.

- Industrial and retail demand has grown quite impressively and silver is moving towards a more balanced market. The expansion of photovoltaic demand is encouraging, but prospects are not to be overdone as it accounts for a mere 8% of overall silver demand. Investment interest will continue to dictate.

UBS 79

Mining and Steel Primer 18 May 2011

Platinum

Key facts

Platinum supply Common ore minerals: Native platinum (chemical symbol: Pt) Sperrylite (platinum arsenide) Normally occurs in association with mantle rocks

Chart: Platinum production by region, 2010

Russia 13%

Major mining/production operations Anglo American Platinum is the world's biggest producer with several major operations on South Africa's Bushveld

Chart: Platinum price premium over palladium 2000

Other 13%

Aquarius Pt 5%

Nth Am 3%

Anglo Platinum 35%

Norilsk 12%

Sth Africa 77%

Lonmin 12%

Impala 23%

Source: Johnson Matthey

Source: GFMS

Chart: Geographic consumption 2010

Chart: End uses of platinum 2010

US$/oz

1500

Others 7%

Chart: Top 10 platinum producers, 2010

Europe 27%

RoW 14%

1000

Other 26%

Autos 39%

500 China 26%

0 -500

Japan 15% N. America 18%

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

-1000

Source: Thomson Datastream, UBS estimates

Source: Johnson Matthey

Electrical 3%

Jewellery 32%

Source: Johnson Matthey

Demand Chart: World platinum consumption 9,000 7,500 6,000 4,500 3,000 1,500 0

History of platinum

Total

Autocatalyst

2007

2003

1999

1995

1991

1987

1983

1979

1975

000 oz

Jewellery

- Platinum used by the Egyptians 700 BC; named platina "little silver" by Spanish conquistadors in 1590. - In 1824 substantial platinum deposits discovered in the Ural mountains of Russia. - In 1912, in an attempt to provide a substitute for increasingly rare platinum, white gold is invented. -In 1924, Hans Merensky discovers the largest platinum deposits in the Bushveld complex of Sth Africa, know as the Merensky reef and remains the world's biggest resource. Black empowerment changes, higher costs and southern African politics challenge future supply. - In 1990s PGMs gained in autocatalysts; diesel penetration in the US is a big potential driver. - China grew in importance as a consumer of platinum with CAGR of 74% for 1995-2001. - Prices saw jewellery demand fall by c50% between 1999 and 2006 with lower Chinese demand the main driver. - Platinum hit a record high of US$2301.5/oz on 04 March 2008. Prices corrected in the second half of the year, touching a low of US$744.25/oz. - 10 tonnes of ore and eight weeks is needed to produce 1 oz of metal; the procedure for extraction and refining is extremely complex. PGMs are useful for autocatalysts because they can exist in multiple oxidation states and also they adsorb gases to their surfaces. - Platinum is often used in concert with other PGMs for industrial applications

Source: Johnson Matthey, UBS estimates Pricing and inventories Chart: Margins of key producers (2010)

300

Source: Bloomberg, UBS estimates Key issues Risks: -Global macro data rolling over -Ongoing fallout from Japan auto interruptions

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

150

Jan10

550

Jan07

700 Jan98

1100

950

Jan04

1500

1,350

Change in Swiss Stocks (t) Pt price (US$/oz), left scale Source: Swiss Customs Service, UBS estimates

EBIT margin 2010

Lonmin

1,750

40 35 30 25 20 15 10 5 0 Norilsk Nickel

1900

Impala

0 10 20 30 40 50 60

2300

Average AM fix, US$/oz

Jan01

2,150

Chart: Swiss Platinum Stocks

Angloplats

Chart: Long term pricing trends

ROIC 2010

Source: UBS estimates Norilsk figures are of CY09

- Cautious commodity call amid tense market sentiment -Limited supply growth and the threat of production interruptions in South Africa are price positive

UBS 80

Mining and Steel Primer 18 May 2011

Palladium

Key facts

Palladium supply Common ore minerals: Native palladium (chemical symbol: Pd) Alloys with copper and nickel complexes Normally occurs associated with mantle rocks

Chart: Palladium production by region, 2010

Major mining/production operations Norilsk Nickel's operations in the Kola Peninsula produce 3moz/year as a by-product of nickel mining

900 800 700 600 500 400 300 200 100 0

surplus (deficit) koz lhs

2,000 1,500 1,000 500 0 -500 -1,000

average price US$/oz rhs

Source: Johnson Matthey, UBS estimates

Others 11% Lonmin 5% Norilsk 47%

Stillwater 6%

Others (mostly Zim) 5%

Impala 12%

Anglopat 19%

Source: Johnson Matthey, UBS estimates

Source: GFMS

Chart: Geographic consumption 2010

Chart: End uses of palladium 2010

2011E

2008

2005

2002

1999

1996

1993

1990 2,500

South Africa 35% North America 8%

Russian Sales 52%

Chart: Palladium market balance and price

Chart: Payable prodn of top 10 producers, 2010

RoW 17%

Europe 17%

Jewellery 7%

Other 1% Autos 58%

Chemical 4%

Japan 16%

China 20%

Invest. 7%

Dental 7%

Nth America 30% Source: Johnson Matthey

Electrical 16% Source: Johnson Matthey

Demand Chart: World palladium consumption 10,000

History of palladium

000 oz

8,000 6,000 4,000 2,000

Total

2009

2005

2001

1997

1993

1989

1985

1981

0

Autocatalyst

- Ancient Egyptians and pre-Columbian Indian civilisations used PGM alloys. - W. H. Wollaston discovered palladium in 1803; named after the asteroid Pallas, goddess of wisdom. - 1935: building of Norilsk Combine began. Production started in 1939 and the operation rapidly grew to represent some 90% of the USSR's PGM production. - Fabrication demand took off in the 1970s with applications in electronics, dental and some small jewellery usage. - In the early 1990's palladium use in autocatalysts started to displace pricier palladium. By the end of the millennium very large autocatalyst use and erratic Russian supply saw palladium spike sharply higher, prompting substitution in autocatalysts (Pt), in electronics (NiAg) and in dentistry (Au) triggering price falls. - Palladium's discount to platinum has seen reverse substitution in autocatalyst since 2004 . - Palladium is generally found in association with copper, nickel and chromite ores and usually occurs with other PGMs. Palladium can be mixed with gold to produce white gold. PGMs are useful for autocatalysts because they can exist in multiple oxidation states and also they absorb gases to their surfaces.

Source: Johnson Matthey, UBS estimates Pricing and inventories

Adj. Swiss Pd stocks (t) Pd price (US$/oz), left scale Source: Swiss Customs Statistics, UBS estimates

40

50

30

100

20

150

10

200

0

EBIT margin

Stilwater

0

Norilsk Nickel

Chart: Margins of key producers (2010)

Impala

Jan-10

Jan-08

Jan-06

Jan-04

Jan-98 2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

Source: Thomson Datastream, UBS estimates

Jan-02

1,100 900 700 500 300 100

Average AM fix, US$/oz

Jan-00

900 800 700 600 500 400 300 200 100 0

Chart: Swiss Palladium stocks and prices

Angloplats

Chart: Long term pricing trends

ROIC

Source: UBS estimates Norilsk figures are of CY09

Key issues - Supply: Swiss imports from Russia at minimal levels and Russian sales are expected - Demand: Chinese auto demand growth to slow, but still robust, Chinese net imports to to decline this year, scrap supplies set to follow 2010 growth trend amid higher prices remain strong, US auto sales strong so far in 2011.

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Molybdenum

Key facts

Molybdenum supply Common ore minerals: Molybdenite (MoS2) Wulfenite (PbMoO4) Powellite (CaMoO4)

Chart: Molybdenum production by region, 2009 Chile 16%

U.S 22%

Other 11%

Chart: Molybdenum Ore Reserves, 2009

S.Copper 8%

Canada 4%

Codelco 9%

Freeport 11%

Source: IMOA, UBS estimates

Chart: Regional demand for molybdenum, 2010

Chart: End uses of Molybdenum, 2010

China 44%

Cast Iron 6% Mo Metal 6% Tool & H.S steel 11%

China 27%

Other 16% Japan 14%

Superallo ys 5%

Source: IMOA

Other Steel 35% St. Steel 24%

Cat & other 13%

W Eur 27%

U.S 16%

U.S 28% Source: USGS

Other 49%

China Moly 7%

Source: USGS

Other 17%

Chile 11%

Kennecott 5%

TCM 5%

JDC 6%

Peru 6%

China 41%

Major mining/ production operations FCX is the largest producer with about 11% share of global production. Cedelco is also a major producer with annual share of 9% in 2009

Chart: Major producers of molybdenum 2009

Source: IMOA

Demand Chart: Global Apparent consumption (kt)

History of Molybdenum

55 45 35 25 15 2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

5

- Molybdenum was not discovered until the latter part of the 18th century, and does not occur in the metallic form in nature. - In 1778 the Swedish scientist Carl Wilhelm Scheele discovered, that molybdenite was the sulfide of a previously unknown metal which he named molybdenum - In 1891, the French company Schneider & Co. first used molybdenum as an alloying element in the production of armour plate. - In 1930s there was proper determination of temperature ranges for the forging and heat treatment of molybdenum-bearing high-speed steels. - The years from 1945 to the present have seen a dramatically expanding range of applications for molybdenum, its alloys and its compounds - The world's largest producers of molybdenum materials are the United States, Canada, Chile, Russia, and China - Molybdenum is also used in alloys for its high corrosion resistance and weldability - Molybdenum is mined as a principal ore, and is also recovered as a byproduct of copper and tungsten mining. It is often used in highstrength steel alloys

Source: USGS Pricing and inventories

Source: UBS

Chart: Profitability and returns of key producers

0

Stocks (kt) Source: USGS

Global prodn (kt) - RHS

EBIT margin 2011

Antofagasta

0

Rio Tinto

50

Southern Copper

100

5

100 80 60 40 20 0 FCX

10

2008

150

2006

15

2004

200

2002

20

2000

250

1998

25

1996

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

Molybdenum, US$lb

1994

40 35 30 25 20 15 10 5 0

Chart: Production and stocks

1992

Chart: Long term pricing trends

ROIC 2011

Source: UBS estimates

Key issues -Growth of supply from byproduct producers due to large number of new copper mines -Production from China given it has one of the largest reserves in the world -Demand which is generally a function of world GDP growth given molybdenum use in coming up wide variety of industries -Timing of the start of of Freeport's Cllimax mine

UBS 82

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Rare Earths

Key facts

Rare Earths supply Common ore minerals: Collection of 17 chemical elements in the periodic table which include scandium, yttrium and fifteen lanthanoids

Chart: Rare Earths resources by region,

200 100 50 0 2010 China Mt Pass India & Russia

Source: Lynas presentation (Sep 2010)

Brazil Malay sia

Source: Asian Metals Ltd.

Source: USGS

Chart: End uses of rare-earths rare earths2010E

Chart: Indicative global supply-demand of REO

Glass/Cerami c 10%

NdFeb magnets/ phosphor materials etc 55%

Metallurgy/Me chanical 15%

2014 Mt Weld Recy cling*

India

India 1%

Petrochemica l 10% Agriculture/Li ght industry/Textil e 10%

150

China

Australia 5% Canada 1%

China 52%

Major rare earth exposure Inner Mongolia Baotou Steel Rare-Earth China Nonferrous Metal, MolyCorp, Lynas Corp Neo Material,China Rare Earth,Arafura Resources Avalon Rare Metals,Rare Elements,Frontier Rare Earths Quest Rare Minerals,Greenland Minerals and Energy Chart: Supply growth estimates

Chart: Major producers of rare earths 2010E

Common United States wealth of 13% Independent States 6%

Source: Asian Metals Ltd

Source: Arafura Resources

Demand Chart: World rare earthsdemand by application

Others

Glass

Phosphorus

FCC

2010

Polishing

Auto

Battery

Metallurgy

Magnets

60 40 20 0

2010 demand 128kt 2014E 177kt Magnets will be the growth driver to 2014

kt

2014E

History of rare earths -Rare earth elements first became known in the year 1787 with the discovery of black mineral ytterbite by Lieutenant Carl Axel Arrhenius. Yttrium and cerium were the first two known rare earth elements -Researchers took almost 30 years to determine other elements contained in the ores ceria and ytteria. -By 1842, six rare earth elements had been identified. Further discoveries between 1886 and 1901 led to the identification of several other elements . Minerals such as bastnasite, monazite and loparite are the primary sources for of rare earth elements -Rare earth elements are not as rare as the name suggests and with the exception of one or two elements, rare earths are available in relatively high concentrations in the earth’s crust -China supplies almost 93% of the world’s rare earth's supply. Japan with an automotive and high-tech manufacturing industry is the largest market for Rare Earths outside of China -Rare earth have unique electron configuration, high magnetic anisotropy and large magnetic moment, fluorescence, high refractive index, high conductivity and are efficient hydrogen storage in its alloys

Source: Lynas Corp Presentation Mar'11 Pricing and inventories Chart: REO equities’ price movement (rebased to 100) Chart: China's gap in prodn, exports of REO 400 350 300 250 200 150 100 50 0

Rare Earth ETF launch

160,000 140,000

Chart: EBIT and ROIC margins of producers 40

tonnes

Production

Ex ports

35 30

120,000

Ex port quota announcement

25

100,000

20

Moly corp Av alon

Source: Bloomberg

Ly nas Rare element

Arafura

Nov/10

Oct/10

Sep/10

Jul/10

Aug/10

Jun/10

May/10

Apr/10

Mar/10

Jan/10

Feb/10

80,000

15

60,000

10

40,000

5

20,000

0 Bautou

2002

2003

2004

2005

2006

Source: Adapted from Global trade atlas

2007

Molycorp

2008

Neo material

China Rare Earth

Source: Bloomberg

Key issues -In July 2010 China cut export quotas for rare earths by more than 70% y/y as part of its REO against the demand of 200-210kt by 2014. The total supply is not likely to be able to meet the growing global demand and may have to be met by non-Chinese production. twice-a-year review of the export quota policy - According to Arafura Resources, China will probably supply only 160-170kt of

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Other materials Metals Antimony (Sb)

Antimony may be used as a hardener for lead in storage batteries and also as a solder and in other alloys, particularly for flame-retardant applications. Its main ore mineral is stibnite. China is the world’s biggest producer, with 90% of world mine production in 2009, although export controls imposed in the past few years have led to a dearth of antimony, which has resulted in significant price increases. Bismuth (Bi)

Bismuth is mainly a by-product of lead processing. It is the heaviest of the socalled ‘heavy’ metals and is the only one that is non-toxic. It is used in solders and a variety of alloys, additives, medications and in atomic research. It is also used as a non-toxic substitute for lead. The world’s largest producers as on 2009 are China (73%) and Peru (12%). China has by far the world’s largest reserves. Cobalt (Co)

The largest use for cobalt is in superalloys, to make parts of gas turbines and aircraft engines. It is also used to make magnets, corrosion- and wear-resistant alloys, diamond tools and catalysts, and has a variety of chemical applications. World production of cobalt has been increasing steadily since 1993. Demand is heavily influenced by general economic conditions and demand from those industries that consume large amounts of cobalt. Cobalt is produced mainly as a by-product of copper and nickel production, so production increases or decreases in line with production of these metals. The largest producers of cobalt as on 2009 include Congo (49%), Russia (8%), China (8%) each Democratic Republic of the Congo has the highest reserve base. Chromium (Cr)

Chromium has a multitude of uses. It is used in iron, steel and non-ferrous alloys to enhance hardenability and resistance to corrosion and oxidation. Other applications include alloy steel, metal plating, pigments, catalysts and surface treatments. South Africa is the largest producer of chromite ore as on 2009, with 36% of the world’s total production, while India has 19% and Kazakhstan accounts for 17% of the world production. About 95% of the world’s chromite resources are in Kazakhstan and southern Africa. Lithium (Li)

Lithium is used in ceramics, glass and primary aluminium production, as well as in batteries. The larger producers as on 2009 are Australia (33% of the world’s total production), Chile, China and Argentina.

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Magnesium (Mg) Magnesium is an extremely abundant element in the earth’s crust (about 2%) and the third most plentiful in seawater. Commercially significant magnesium minerals include dolomite, magnesite, brucite, carnallite and olivine. Magnesium compounds, and magnesium oxide in particular, are used as refractory materials in furnace linings. Magnesium metal is primarily used in association with aluminium in alloys in beverage cans, automobiles and machinery. It may also be used to remove sulphur from iron and steel. China is the largest producer of magnesium compounds (magnesite) as on 2009 with 58% of world production, while Turkey (10%), Korea and Russia are also significant producers. Russia and China have the largest reserves. Manganese (Mn)

Manganese is an essential component of iron and steel production because of its sulphur-fixing, deoxidising and alloying properties. Steelmaking accounts for 85-90% of manganese use – the manganese of the form of ferroalloys. These manganese steels are used primarily for construction, machinery and transportation. Manganese may also be used in aluminium alloys and, as manganese oxide, in dry cell batteries. Manganese compounds may be used as fertilisers, animal feed and colourants for bricks. The largest producers as on 2009 are China (22% of the world’s total production) and Australia (20%), with Ukraine having the largest reserve base.

Tungsten (W) Tungsten’s largest use is as tungsten carbide in cemented carbides, which are wear-resistant materials used in the metalworking, mining and construction industries. Tungsten metal may be used for wires, electrodes, heavy metal alloys used for armaments, heat sinks and high-density applications, superalloys for turbine blades and wear-resistant alloys. Tungsten composites may be used as a substitute for lead in bullets, while chemical compounds are used in catalysts, inorganic pigments and high-temperature lubricants. China has been the dominant producer in recent years (and will continue to be so as it has the largest reserve base), with its cheap exports killing off mining in many other countries. It accounts for about 83% of world production as on 2009. Russia, Canada and Bolivia also produce fair amounts. Vanadium (V)

Vanadium is used in small amounts in ferrous alloys to improve toughness and resistance. The principal producers are China (39%) and South Africa (32%), which also dominated the reserve base as of 2009.

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Non-metals Sulphur (S)

Sulphuric acid, one of sulphur’s derivatives, is one of the most important industrial raw materials. It is of major importance to every sector of the world’s industrial and fertiliser businesses to such an extent that sulphuric acid consumption is regarded as one of the best indicators of a country’s industrial development. Sulphur may be produced as a by-product at petroleum refineries as well as from pyrites and native sulphur mining. The largest producers as on 2009 are the US and China, each with 14% of the world’s total production, Canada (10%) and Russia (10%).

Industrial minerals Asbestos

Asbestos is the generic name given to six fibrous minerals that are used in commercial products. These are chrysotile, crocidolite, amosite, anthophyllit asbestos, tremolite asbestos and actinolite asbestos, with chrysotile being produced in the largest quantities. The properties that make asbestos useful are its high tensile strength, coupled with high chemical and thermal stability, flexibility, low conductivity and large surface area. Major end uses are roofing products, gaskets and friction products. The asbestos industry has been affected by health liabilities and public opposition to the use of asbestos and it is no longer widely used. Many basic materials companies such as Dow Chemical, Georgia-Pacific and Gencore have been affected by asbestos litigation and the resulting share price volatility. Barite

Barite is the mineralogical name for barium sulphate, which is also sometimes known as barytes. Coarse barite grains may be used in ‘heavy’ cement, while fine barite may be used as a filler or extender, as an addition to industrial products or a weighting agent in well drilling. Historically, oil well drilling has been a driving force in barite demand, but it has been of less importance in recent years. The largest producer of barite as on 2009 is China, with 49% of the world’s total production, followed by India with 20%. These two countries also dominate the reserve base. Borates

Boron compounds are used primarily in the glass and ceramics industries, and to a lesser extent, in soaps and detergents, agriculture and fire retardants. Turkey is the world’s largest producer as on 2009 (37% of the world’s total production), with Argentina (21%) and Chile (17%) also producing significant amounts. These three dominate the reserve base, although it should be noted that China also has extensive reserves. Calcite/limestone

Limestone (made up of the mineral calcite or calcium carbonate, as well as varying amounts of silica) is one of the most important and accessible natural UBS 86

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resources for the cement, steel and agriculture industries. Despite the low value of its basic products, this is a high value segment when volumes are taken into account. Gypsum

Gypsum is one of the most widely used minerals in the world due to its use in making plasterboard (wallboard) for homes, offices and commercial buildings. A typical new home contains seven tonnes of gypsum alone. It is also used in concrete for roads, bridges and buildings, and as a soil conditioner. Demand for gypsum depends very much on the wellbeing of the construction industry. China is the largest producer as on 2009 with 30% of the world’s total production. Iran, with 9%, and US, with 6%, are also large producing regions. Kaolin

Kaolin or China clay is a fine-grained, white material that is used as a dye and a filling agent in paper and refractory markets. Marble

Marble is a metamorphosed form of calcium carbonate, which has been baked and pressurised at depth in the Earth’s crust to form a fine-grained, hard material suitable for decorative use. Phosphate

Phosphate minerals are the only significant global resources of phosphorous, an essential element for animal and plant nutrition. Most phosphorous is consumed as a component of nitrogen-phosphorous-potassium (NPK) fertilisers used for arable crops. As on 2009 China is the world’s leading producer (36%) and consumer of phosphate rock. Other major producers as on 2009 are US (16% of the world’s total production), Morocco and Western Sahara (14%). Potash

Potash, like phosphorous, is used primarily as an agricultural fertiliser. The name potash denotes a variety of mined and manufactured salts containing potassium in water-soluble form. Potash consumption has been declining in recent years. Major producers as on 2009 are Canada (21% of the world’s total production), Russia (18%) and China (14%). Salt

Salt (rock salt or sodium chloride) may be used as a flavour enhancer in food, or on roads and walkways to remove ice. It is also used as a feedstock for the manufacture of chlorine and caustic soda. Chlorine may then be used to make plastics such as PVC, while paper-pulping chemicals may be manufactured from caustic soda. China is the world’s largest producer with 21% of the world’s total production as on 2009. The US (16%) is also a large producer.

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Soda ash

Soda ash is the trade name for sodium carbonate, a chemical refined from the mineral trona or sodium carbonate-bearing brines. It is an essential raw material for glass, chemicals, detergents and other major industrial products. Zirconium

Zircon (zirconium silicate) is used for refractories, foundry sands and ceramic opacification, while its oxide is also used to produce cubic zirconia, which may be used to simulate diamonds. Zircon itself may also be used as a natural gemstone. Zirconium is used in nuclear fuel cladding, chemical piping in corrosive environments, heat exchangers and speciality alloys. Zircon is a byproduct of the mining and processing of heavy mineral sands and is the primary economic source for zirconium. Australia (41% of the world’s total production) and South Africa (34%) are the world’s largest producing regions as on 2009.

Gemstones These are minerals, stones or organic matter that can be cut, polished or otherwise treated for use in jewellery or other ornaments. Diamond, corundum (ruby, sapphire), beryl (emerald, aquamarine), topaz and opal are classified as precious stones; other gemstones are usually classified as semi-precious. Gemstones are not common in nature and do not form ore deposits in the normal sense. When present at all, they tend to be scattered sparsely through a large body of rock, to have crystallised as small aggregates or to fill veins and/or small cavities. They occur in most geologic environments, but are most common in pegmatites, stream gravels (as placer deposits) and metamorphic rocks. Diamonds

Diamonds could equally well be classified as an industrial mineral —as they are one of the world’s most versatile engineering materials — as well as the most famous gemstone. Diamond is the strongest and hardest known material and has the highest thermal conductivity of any material at room temperature.

Industrial and gemstone applications

If diamonds do not meet gem-quality standards, they are used in industrial applications, principally as abrasives, where they cut faster and last longer than competing materials. Synthetic diamonds are of growing importance for industrial applications, accounting for up to 90% of industrial diamond usage in the US, the largest market for industrial diamonds. The industrial diamond market has been healthy and we expect it to remain so over the next few years, although there is increasing demand for synthetics over natural diamond material.

Synthetic diamonds used increasingly for industrial applications

South Africa has historically dominated mine production of diamonds, but in recent years Australia, Russia and other African countries have gained importance and market share and there is now significant mine development in Canada. The Russian industry is experiencing structural changes as mining operations move underground; this is likely to lower production and increase costs in the short term.

South Africa has historically dominated the industry but Russia, Australia and Canada are of growing importance

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Figure 1: Regional reserves, production and demand (% of world) – alumina, copper, iron ore and steel, and lead

Abu Dhabi Argentina Australia Austria Bahrain Belgium Bolivia Botswana Brazil Bulgaria Canada Chile China Colombia Congo Czech Rep Dominican Republic Egypt Finland France Ghana Germany Greece Guinea Guyana Hungary Iceland India Indonesia Iran Iraq Italy Kazakhstan Kuwait Jamaica Japan Libya Malaysia Mexico Morocco Mozambique Netherlands New Caledonia Norway Peru Philippines Poland Qatar Romania Russia Saudi Arabia Serbia South Africa South Korea Spain Suriname Sweden Switzerland Taiwan Thailand Turkey Ukraine United Kingdom United States Venezuela Veitnam Zambia Others

Alumina Copper Metal Iron ore and steel Lead Bauxite Aluminium (contained Steel Steel Metal reserves Production Consumption Reserves Metal Production Consumption Fe) Production Consumption Reserves Production Consumption 1% 1% 0% 1% 0% 0% 1% 0% 23% 5% 1% 4% 2% 1% 17% 1% 29% 2% 0% 1% 0% 0% 2% 1% 1% 2% 1% 1% 2% 7%

3%

4%

2%

7%

2%

41%

41%

1% 1% 30% 6%

2% 17% 24%

2% 0% 1% 1% 37%

12%

2%

1%

1%

9%

45%

2% 1%

1% 1% 3%

0%

15%

44%

44%

0%

1%

1%

1%

1%

7% 0%

3%

4% 0%

4%

0%

0%

43%

1%

1%

1% 2% 27% 3%

0%

0%

1%

1% 0% 1%

5% 1%

4%

0% 3%

2% 4% 1%

4% 1% 0%

6%

3% 1%

2% 1%

1%

3% 1% 1%

6%

2%

5%

3%

2%

3% 3%

5%

0%

2%

2% 0% 1%

2% 1%

2%

3%

2%

2%

1% 3% 0%

1% 2%

4%

7% 5% 1% 0%

7%

8%

6%

1%

1% 1%

8% 1%

5%

1%

6%

1% 0% 3%

0%

0%

0% 12% 0% 0%

5%

2% 1% 3%

4%

5%

0% 0% 1%

8% 1%

4%

0% 5%

1%

0% 1%

1%

0%

0%

0% 1%

9% 2% 1%

0% 2% 0% 2% 3% 1%

0% 3% 2%

0% 0% 1% 1% 2% 0% 1% 11% 1%

1%

0% 2% 1% 0% 0% 4% 1%

18%

0% 1% 4% 1%

0%

1% 3% 1%

2%

1%

4%

1% 3% 3%

2%

0% 0% 1% 8% 12%

4% 1% 12%

3%

1% 0% 3% 1% 2%

3%

12% 6%

6%

0% 9%

4% 13%

3% 4%

1% 0% 1%

3% 3% 9%

0% 1%

1%

2% 2% 1% 6%

2% 7%

9%

32%

0% 1% 0%

1% 2% 1%

10%

3% 14%

2% 16%

19%

4%

7%

Source: AME, Brook Hunt, CRU, GFMS, Johnson Matthey, USGS, UBS estimates

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Figure 2: Regional reserves, production and demand (% of world) – nickel, zinc, gold, and PGMs Nickel Zinc Gold PGMs Metal Metal Metal Mine Platinum Reserves Production Consumption Reserves Production Consumption Reserves Production Consumption Reserves Production Abu Dhabi 1% Argentina 0% 2% Australia 37% 8% 11% 4% 2% 12% 10% 0% Austria 1% Bahrain 0% Belgium 2% 2% 3% Bolivia 0% 0% Botswana 1% Brazil 6% 2% 2% 2% 2% 4% 3% 1% Bulgaria 1% 0% Canada 6% 6% 0% 4% 5% 1% 2% 3% 1% 0% 3% Chile 4% 1% 0% China 2% 22% 33% 17% 41% 40% 4% 13% 18% Colombia 2% 3% 1% 1% Congo 1% Czech Rep 0% Dominican Republic 1% Egypt 0% 2% Finland 3% 3% 2% 0% France 1% 2% 1% 2% 0% Ghana 3% 3% Germany 7% 1% 4% 1% Greece 1% 1% 0% 0% Guinea 3% 3% Guyana 0% Hungary Iceland India 2% 5% 5% 4% 0% 28% Indonesia 5% 1% 6% 5% 1% Iran 0% 1% Iraq 1% Italy 4% 1% 2% 5% Kazakhstan 9% 2% 1% Kuwait 0% Jamaica Japan 12% 11% 5% 5% 0% 6% Libya 0% Malaysia 0% 2% Mexico 7% 3% 2% 3% 3% 1% Morocco Mozambique Netherlands 2% New Caledonia 10% 3% Norway 6% 1% Peru 10% 2% 3% 6% Philippines 1% 2% 0% Poland 2% 0% 0% Qatar 0% Romania Russia 9% 18% 2% 1% 11% 8% 2% 9% 11% Saudi Arabia 0% 2% Serbia South Africa 5% 3% 2% 1% 2% 13% 8% 1% 88% 79% South Korea 2% 6% 6% 4% 2% Spain 0% 2% 4% 0% Suriname 1% Sweden 2% 0% 0% Switzerland 1% Taiwan 5% 2% 1% Thailand 1% 0% 1% Turkey 1% 4% Ukraine 1% United Kingdom 2% 2% 1% 0% United States 10% 7% 2% 8% 6% 9% 7% 1% 2% Venezuela 1% 1% 1% 0% Veitnam 0% 0% 0% Zambia Others 13% 5% 5% 32% 2% 14% 25% 15% 6% 1% 4%

Source: AME, Brook Hunt, CRU, GFMS, Johnson Matthey, USGS, UBS estimates

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Figure 3: Regional reserves, production and demand (% of world) – silver, diamonds, coal, oil and gas Silver Diamond Coal Oil Gas Mine Reserves Production Consumption Reserves Production Reserves Production Consumption Reserves Production Consumption Reserves Production Consumption Abu Dhabi 7% 3% 1% 3% 2% 2% Argentina 3% 0% 0% 0% 1% 1% 0% 1% 1% Australia 8% 8% 1% 16% 20% 9% 7% 2% 0% 1% 1% 1% 1% Austria 1% 0% 0% 0% Bahrain 0% 0% Belgium 2% 0% 1% Bolivia 5% 6% 0% 0% Botswana 0% 22% 11% Brazil 0% 1% 1% 0% 0% 1% 3% 3% 0% 0% 1% Bulgaria 0% 0% 0% 0% 0% 0% Canada 4% 2% 2% 1% 1% 1% 2% 4% 3% 1% 5% 3% Chile 18% 6% 0% 0% 0% 0% China 9% 13% 15% 2% 1% 14% 46% 47% 1% 5% 10% 1% 3% 3% Colombia 0% 0% 1% 1% 0% 0% 1% 0% 0% 0% 0% Congo 26% 31% 0% 0% Czech Rep 0% 1% 1% 0% 0% 0% Dominican Republic 0% 0% Egypt 0% 0% 0% 1% 1% 2% 1% Finland 0% 0% 0% 0% France 1% 0% 0% 2% 1% Ghana 0% Germany 5% 1% 1% 2% 3% 0% 0% 3% Greece 0% 0% 0% 0% 0% 0% 0% Guinea 0% 0% 0% 0% Guyana Hungary 0% 0% 0% 0% 0% 0% Iceland 0% 0% India 1% 11% 7% 6% 7% 0% 1% 4% 1% 1% 2% Indonesia 1% 1% 1% 5% 1% 0% 1% 2% 2% 2% 1% Iran 0% 0% 0% 10% 5% 2% 16% 4% 4% Iraq 9% 3% 2% Italy 4% 0% 0% 0% 2% 0% 0% 2% Kazakhstan 2% 4% 2% 1% 3% 2% 0% 1% 1% 1% Kuwait 8% 3% 0% 1% 0% 0% Jamaica Japan 0% 12% 0% 0% 3% 5% 3% Libya 0% 3% 2% 1% Malaysia 0% 0% 0% 1% 1% 1% 2% 1% Mexico 9% 17% 2% 0% 0% 0% 1% 4% 2% 0% 2% 2% Morocco Mozambique Netherlands 0% 1% 1% 2% 1% New Caledonia Norway 0% 0% 1% 3% 0% 1% 3% 0% Peru 15% 16% 0% 0% 0% 0% 0% 0% 0% Philippines 0% 0% 0% 0% Poland 14% 5% 0% 1% 2% 2% 1% 0% 0% 0% 2% 2% 0% 14% 3% 1% Qatar Romania 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Russia 5% 7% 21% 19% 4% 3% 6% 13% 3% 24% 18% 13% Saudi Arabia 20% 12% 3% 4% 3% 3% Serbia South Africa 0% 0% 12% 11% 4% 4% 3% 1% South Korea 3% 0% 0% 2% 3% 1% Spain 0% 0% 0% 0% 0% 2% 1% Suriname Sweden 1% 0% 0% 0% 0% Switzerland 0% 0% 0% Taiwan 2% 1% 1% 0% Thailand 0% 4% 0% 0% 0% 0% 0% 1% 0% 1% 1% Turkey 2% 1% 0% 1% 1% 1% 1% Ukraine 4% 1% 1% 0% 1% 1% 2% United Kingdom 2% 0% 0% 1% 0% 2% 2% 0% 2% 3% United States 6% 5% 22% 29% 16% 15% 2% 9% 22% 4% 20% 22% Venezuela 0% 0% 13% 3% 1% 3% 1% 1% Veitnam 0% 0% 1% 0% 0% 0% 0% Zambia 0% Others 13% 4% 6% 15% 4% 3% 2% 3% 8% 14% 11% 18% 15% 12%

Source: AME, Brook Hunt, CRU, GFMS, Johnson Matthey, USGS, UBS estimates

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Section 4: Hard rock to heavy metal

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How did it get there and how do you get it out? Geology and mining Geology is the science of the earth. Applied geology is used extensively by the mining industry first to locate ore deposits, then to extract the key materials economically.

Geology is the science of the Earth

Basic geology

The five most abundant elements in the Earth’s crust are oxygen, silicon, aluminium, iron and calcium. These elements bind together, in association with other elements, in chemical compounds to form solid crystalline substances called minerals. The concentration of minerals in sufficient quantities is termed a mineral deposit. Mineralisation can be termed ore when the minerals are present in sufficient quantity or tonnage, and quality (known as grade), to be recovered profitably. Deposits are usually mined to produce metals, such as copper and gold, or other commodities such as coal.

A concentration of minerals in sufficient quantity to be extracted economically is called a mineral deposit

Metals may be split into groups, depending on their uses or properties. The diagram below shows the different groups of metals and some examples. Figure 4: The major groups of metals classified by uses and properties

Precious Metals eg gold, silver, PGMs

Semi- Metals possess metallic and nonmetallic attributes eg silicon, arsenic, selenium

Radioactive Metals often used for power generation eg radium, thorium, uranium, plutonium

Rare Earth Metals eg scandium, ytrium, zirconium and 15 lanthanides Refractory Metals can withstand high temperatures eg niobium, tungsten, ruthenium

Light Metals valued for lightness and strength eg berrylium, magnesium, aluminium, titanium

Reactive Metals easily react with oxygen, less stable eg lithium, strontium, cesium

Base Metals lower value metals eg copper, lead, zinc, Non-Ferrous Metals not used in steelmaking eg copper, lead, zinc, lead, magnesium, nickel, tin

Ferrous Metals chemical affinity to iron, used in steelmaking eg iron, chromium, cobalt, manganese, molybdenum

Source: UBS

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The Earth’s cycle Earth is over four billion years old, and its development during that time is the key to how ore deposits have formed and where they have formed. Plate tectonics is one of the key mechanisms that contribute to the formation of ore deposits. Plate tectonics is the mechanism behind continental drift, whereby the tectonic plates which host the outer surface of the Earth’s crust move around over the mantle, away from each other (diverging plate margins) and toward each other (collision or converging plate margins). At diverging margins, new material from deep within the earth is erupted to the surface, whereas at collision margins one plate may be pushed beneath another, or may literally crumple up against another. This results in extremely high temperatures and pressures at depth, which can result in earthquakes, volcanic reactions and lots of circulation by hot melted rock fluids close to these margins. Converging margins may also result in the formation of mountain ranges as the plates are pushed together, or one is pushed beneath another, causing uplift.

Tectonic plates move across the Earth’s surface and often govern the location of ore deposits

Three major rock types There are three different types of rock in the Earth’s crust (the outer layer of the Earth). They are defined by their method of formation and are known as igneous, sedimentary and metamorphic rocks. Sedimentary rocks tend to be the source of energy deposits (coal and oil), while metallic deposits are often, but not exclusively, associated with igneous and metamorphic rocks. Molten material originating at great depths in the crust, or below, is called magma. As this magma rises through the crust, it may cool and solidify to form igneous rocks. These may be intrusive (ie, the magma crystallised when still covered by other rocks), or extrusive (the magma rose to the surface and was erupted, for example by a volcano).

Molten rock rises from the centre of the Earth to form igneous rocks

The intermediate stage in the geological cycle is caused by erosion. Rock formations may be eroded at the surface by mechanical means (ie, by the effect of wind, water or ice), or by chemical means (when some of the minerals in a rock may be dissolved by a water solution). Eroded material is then carried, by wind, water or ice, and may be deposited as loose material (for instance at the end of a glacier, on the shore or bed of a river or on a beach). As this loose material collects, it is buried and then compacted to form sedimentary rocks.

Erosion of rocks at the surface and subsequent burial and compaction results in the formation of sedimentary rocks

The final stage of the cycle comes about as previously formed igneous and sedimentary rocks are heated and pressured at depth to form metamorphic rocks. This may occur in convergent tectonic regions where rocks are pushed together at high temperature and pressure, or may be caused by the intrusion of hot igneous material at depth.

Metamorphic rocks form at high temperatures and pressures within the crust

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Figure 5: The geological cycle Continental plate Mountain range Sedimentary rocks

Mid-ocean ridge

Uplift Weathering Transportation Deposition

Compaction (high temp, pressure) Oceanic crust

Igneous rocks

Molten and semi-molten mantle

Plutonic Igneous roc ks Contact metamorphism

Conv ergent plate margin

Metamorphic rocks

Div ergent plate margin

Source: UBS

Development of rock formations and structures When sediments are laid down, they are normally in relatively horizontal layers; however, these layers may be deformed over time through the effect of pressure to form different shapes, and the layers may adopt different orientations up to and beyond vertical. This deformation is termed folding. The orientation of a particular layer or bed may be described by strike and dip. Strike and dip can be illustrated by imagining a sheet of wood at an angle in a water tank. The line where the sheet and the water surface intersect is the strike, while the angle the wood makes with the surface of the water is the dip.

When layers of sediment are deformed it is called folding

Igneous rocks occur in three major forms. In their most simple form they occur as a batholith, a large body of magma at great depth. However, small sheet-like offshoots of igneous material can also escape from larger bodies, normally pushed by heat or pressure, and these can cut through older igneous, sedimentary or metamorphic rocks. These intrusions may be known as dikes (when they cut across the orientation of the country rocks), or sills (when they are parallel to that orientation). Mineral zones may form as igneous bodies cool and different minerals cool at different times, settling to different layers in the melt.

Igneous rocks can occur in three major forms

Metamorphic rocks are igneous, sedimentary or other metamorphic rocks that have undergone extreme chemical or physical changes, which often obscure the original rock’s identity. If subjected to high temperatures or pressures, new minerals can be formed that are stable under these conditions.

Metamorphism can obscure a rock’s previous identity, forming new minerals

Fractures are common in rock. If the fracture is large enough and the two sides have moved relative to one another, it is called a fault. Where a series of many smaller parallel fractures form a fault, this may be known as a shear zone. Minerals often concentrate in shear zones and faults.

Minerals often concentrate near rock fractures

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Different types of minerals Minerals may be split into two types; basic rock-forming minerals, such as quartz and feldspar, which in this context will mostly be referred to as gangue (waste from the mining process), and the ore minerals that contain the metals which are of interest to the mining industry. This is not to say that the rockforming minerals do not contain economically significant metals, indeed they do, however, they do not contain these metals in enough concentration, or in a structure that it is economically viable to break down, to be of interest.

Gangue does not contain economically significant minerals

A table of metals and their common ore minerals is shown below: Table 13: Key metals and their ore minerals Metals

Symbol

Common ore minerals

Aluminium

Al

Bauxite (hydrated aluminium oxide)

Cobalt

Co

Cobaltite (cobalt suplarsenide, 36% Co)

Chromium

Cr

Chromite (ferrous chromic oxide, 46% Cr)

Copper

Cu

Native copper Chalcopyrite (copper iron sulphide, 35% Cu) Chalcocite (copper sulphide, 80% Cu) Bornite (copper iron sulphide, 63% Cu)

Gold

Au

Native gold

Iron

Fe

Haematite (iron oxide, 70% Fe) Magnetite (iron oxide, 72% Fe) Siderite (iron carbonate, 48% Fe)

Lead

Pb

Galena (lead sulphide, 87% Pb)

Molybdenum

Mo

Molybdenite (molybdenum disulphide, 60% Mo)

Nickel

Ni

Pentlandite (nickel iron sulphide, 22% Ni)

Platinum

Pt

Native platinum Sperrylite (platinum arsenide, xx% Pt)

Silver

Ag

Native silver

Tin

Sn

Cassiterite (tin oxide, 79% Sn)

Titanium

Ti

Ilmenite (iton titanium oxide, 32% Ti)

Tungsten

W

Wolframite (iron magnesium tungstate, 77% WO3) Scheelite (calcium tungstate, 81% WO3)

Uranium

U

Pitchblende (uranium oxide, 50-58% U3O8)

Zinc

Zn

Sphalerite (zinc sulphide, 67% Zn)

Source: Northern Miner, UBS

Formation of ore deposits Most of the mineral deposits being mined today were formed hundreds, sometimes thousands, of million years ago and minerals may have concentrated in mineable proportions via a variety of different processes.

Ore deposits can form by a variety of processes

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Mineral exploration Exploration has changed in recent years with satellite and computer technologies. In many countries, government geological surveys have produced regional geological maps. These reports and maps are good sources of reference where they exist, but many areas have never been explored on foot.

Exploration has changed dramatically in recent years

In recent years remote sensing has started to be of greater importance. This is the use of photographic or radar images taken by satellites and aircraft. It can be useful for identifying large-scale geological structures like faults or contacts where mineralisation may occur.

Remote sensing by satellite or aircraft is of increasing importance

Geophysics is the remote sensing of the physical properties of the Earth and it is more concerned with highlighting anomalies where the Earth has unusual properties. Physical properties such as the Earth’s magnetic, electric or gravitational fields are tested since different types of rock have different magnetic and specific gravitational properties. On a large scale, sensors may be towed by aircraft or ships, while on a smaller scale they can be carried by individual geophysicists. A map can be created from the readings, using contours to delineate different levels, exactly the same as on a relief map.

Geophysical properties such as magnetism, gravimetric and electric fields can also help in exploration

Geochemistry is also used routinely in most exploration programmes. A geochemical survey is used to track anomalous concentrations of chemical elements in ground and surface water. Geochemists use a detailed knowledge of the relative mobility of certain elements and the processes that cause this mobility in order to track metals back to their source. They do this by sampling materials such as water, soil or bedrock, analysing them for certain key elements and then plotting the results on a map.

Chemistry of waters also aids exploration geologists

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Table 14: Different types of ore deposit Type of ore deposit

Formation

Common metals/minerals present

Example

Nickel, platinum group metals

Sudbury, Canada (Nickel), Bushveld, RSA (PGMs)

Diamonds

Kimberlite pipes may be found in several areas including Canada, RSA, Russia

Copper, tungsten, molybdenum, gold

Andean copper porphyries

Magmatic and intrusive deposits Layered magmatic deposits Diamond pipes

Porphyry deposits

Skarn deposits Granite-hosted Epithermal veins

Layering of minerals as they cool at different rates in magma chambers Kimberlite, a rock from the earth’s mantle, is erupted to the surface, carrying rock fragments of diamond-bearing rocks to the surface Fracturing and hydrothermal activity caused by igneous intrusions; mineralisation forms in veins or breccia bodies within the intrusion itself and on its margins with country rock over a large area Form at the contact between intrusive rocks and carbonate country rocks Deposits form in veins and pegmatites (coarse grained dykes) associated with granite intrusions Large vein systems, usually in volcanic rocks

Copper, molybdenum, tungsten, tin, gold, iron, zinc Tin, tungsten, molybdenum and uranium; gemstones

Twin Buttes, Arizona, US Tin deposits in southwest Britain

Gold, silver

Cripple Creek, Colorado (gold)

Copper, zinc, lead; gold, silver, cadmium, tin by-products

Kidd Creek deposit, Canada

Base metals

Mississippi Valley, US

Copper

Zambian copper belt

Uranium

Niger, SW US

Gold, diamonds, gemstones

Witwatersrand gold, diamonds in Africa

Aluminium, iron, nickel

Most of the world’s bauxite

Iron

Hamersley, Australia, Lake Superior region, Canada

Gold

Carlin, Nevada, US

Sedimentary deposits Stratabound massive sulphides Carbonate-hosted

Red-bed copper Sedimentary uranium Placer deposits

Laterites

Iron formations

Occur as part of a sequence of volcanic or sedimentary rocks and conform to the host rock’s bedding Metal ores are precipitated by chemical conditions as fluids travel through fractures and pore spaces in carbonate rocks Fine-grained disseminations of base metal sulphides, normally in shales and sandstones; formed by chemical precipitation of circulating fluids Precipitation of uranium from circulating fluids Chemically stable and physically resistant minerals are transported by water and may be deposited in a sedimentary bed Rocks in tropical climates weather to form laterites; some minerals are leached out but several such as aluminium, iron and nickel form insoluble compounds which remain in place Iron minerals are precipitated in layers on a sea floor

RSA;

placer

Other deposits

Replacement deposits

Lode deposits Unconformity uranium deposits

Bodies of rock out of which ore-forming fluids have migrated leaving behind enough mineralisation to make ore. They are often large, low grade deposits. Often the ore may be further concentrated by circulating fluids at a later date, a process known as supergene enrichment Formed in veins or shear zones during tectonic deformation

Key source of high grade precious metals; may also contain base metals

Form at or near the contact of overlying sandstone and underlying metamorphic rocks

Uranium

Coal

Decayed plant material, buried and compacted

Coal

Evaporite

Left over when seawater evaporates in a shallow basin

Potash, salt, gypsum

Saskatchewan, Australia

Canada;

northern

Other materials

Source: Northern Miner, UBS

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Table 15: Common geophysical methods Method

Parameters recorded

Application

Magnetics

Where rocks have high magnetic susceptibility, there will be a stronger magnetic field and vice versa

Deposits with magnetic minerals such as iron deposits, pyrrhotitebearing nickel deposits and scarns may be detected directly. Used to aid geological mapping

Resistivity

Electric current is forced into the ground through widely spaced electrodes; the amount of current that flows depends on the resistance the rock offers

Economic massive sulphide occurrences exhibit anomalously low resistance.

Induced polarisation (IP)

Certain bodies can be ‘charged’ by passing an electric current through them. This can then be measured

Effective in detecting disseminated sulphide minerals, either in economic deposits or as pathfinders

Electromagnetics

Alternating magnetic field induces a current in nearby conductors which can be measured

Because no contact with the ground is required, this is a useful method in airborne geophysics

Gravity

Gravity is not uniform and is stronger over areas where the underlying rocks are more dense and vice versa

Used to indicate areas favourable for further mineral exploration

Seismics

Sound waves travel at different speeds through different rock types, as well as being reflected at boundaries between different rock types. The time they take to travel allows geophysicists to determine the structures of rocks

Widespread method in petroleum exploration

Radiometrics

The presence of radioactivity can be determined using a scintillometer, or gamma ray spectrometer, which can distinguish between the three main radioactive elements in nature - uranium, potassium and thorium

Can be used to assist geological mapping since radioactive elements occur in greater abundance in granites

However, other materials also cause low resistivity, so this method should be used in association with other methods

Source: Northern Miner, UBS

As the exploration team homes in closer to prospects that look promising, it will use smaller-scale exploration processes. Sampling is the process by which small amounts of material are extracted and analysed with the expectation that they will indicate the composition of a larger area. Samples may be taken from the surface, but these do not tend to give a very clear view of the situation at depth.

Companies use surface or sub-surface samples to analyse the composition of rocks

Common drilling methods include diamond drilling, reverse circulation drilling and wireline drilling. Diamond drilling can also be important for established mines. It can be used to explore for new ore or outline and map known ore bodies, to investigate rock types and structures and locate ore bodies displaced by faults and other tectonic features.

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Resources and reserves When a drilling programme has been finished the resources and reserves of a prospect can be calculated using geostatistics. Drill holes are normally spaced at regular intervals. There are various statistical methods that can be used to infer, with varying degrees of accuracy, the grades of mineralisation between drill holes leading to a three-dimensional representation of the deposit. The difference between reserves and resources is of major importance to mining companies and investors. Resources are defined as the material of intrinsic economic interest in a deposit, which has reasonable prospects for eventual economic extraction. Depending on the spacing of the drill holes and hence the geological certainty, the resources may be classified as inferred (low certainty), indicated and measured (high certainty). Reserves are only those areas of the deposit that can be extracted economically. They are subject to more engineering and technical review. Reserve estimations come into play when a company starts to consider actually mining a deposit.

Geostatistics allows companies to ‘fill in the gaps’ around drill holes

Differentiation between reserves and resources is important

Figure 6: Illustration of reserves and resources Total resources

Economic

Identified Demonstrated Measured Indicated

Inferred

Reserves

Sub-economic

Zone of economic uncertainty

Resources Increasing degree of geological assurance

Source: Evans (1993)1

From prospect to mine The process from discovery of a deposit to the actual opening of a mine is different for every operation, but we have tried to show a stylised representation of the sort of timings associated with the process in Figure 4. It is important to note that it can take several years from the discovery of the deposit to actually producing the first product. During this period, projects are cash drains for companies and it is only at the end of the period that they can hope to start to make some money back. This is the reason why the payback period tends to be very important for mining projects. It is also the reason why many larger mining operations are JVs; so that the investing company can share the costs and risks.

1

It can take several years for a discovery to be put into operation as a mine

Evans, A. M. (1993) Ore Geology and Industrial Minerals – An Introduction. 3rd edition. Blackwell: Oxford, 390pp. UBS 101

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Figure 7: Typical timetable for mining project development * Discovery Drilling program Evaluation / pre-feasibility Feasibility study Approval / Go ahead Funding completed Construction / Pre-stripping Mining 0

*

1

2

3

4

5

6

7

Time / years Source: UBS estimates

Once a mineable resource has been established, the company will carry out a pre-feasibility study and then a full feasibility study to determine whether a further investment and eventual development is viable. The feasibility study is also used for funding purposes – in order to attract project finance. The cost estimates in a full feasibility study will be in the region of ±15%.

A feasibility study is carried out to determine the project’s viability

The major question when evaluating a deposit is always the same: does it contain enough recoverable and marketable metals, minerals and gems to be dug up, transported to market and sold at a profit, given price and market assumptions? Diverse risks must be considered by companies in these situations. The most serious risks include: Q

Issues associated with geology (size and grade of the mineable portion of the ore body) and how the deposit can be economically mined.

Q

Metallurgy (often underestimated – how much of the metal can be recovered, what is the preferred recovery method; are there any impurities or associated minerals that could affect this?)

Q

Economics (metal markets and their forecast behaviour, transportation costs, interest rates)

Q

Country risks (political stability, climate, laws)

All risks must be considered

Other risks may include: Q

The effect of any unforeseen political developments (remember that mine lives are often in excess of twenty years so a long-term view is necessary).

Q

Varying currency strengths.

Q

Environmental issues, including the cost of eventual reclamation because all activity is based on a finite reserve with a finite life.

Q

Availability of workers and local labour laws.

These must be offset against any benefits of starting a mine in a particular area; for instance, local or national governments will often give a company tax breaks or incentives to base an operation in a particular area.

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The feasibility study A mine is referred to as a wasting asset. This is an important distinguishing fact when considering mining projects in the context of other businesses. It is imperative that the profits generated by the operations should be enough to pay back the initial investment, and generate a competitive return on this capital, within a reasonable period of time. It is the job of mining engineers to estimate the payback period, based on their estimates for the scope of the mine and the speed of implementation of full production and their estimation of product prices.

Payback period is of key importance when evaluating a project

Cost estimation is one of the key aspects of the feasibility study. Prices for labour, electricity, supplies and transportation must all be considered and, when possible, a company will try to lock in long-term contracts to protect itself from volatility in these costs.

Cost estimation is an important part of the feasibility study

Other costs that may have to be factored in may include the construction of infrastructure. In lower cost, less developed countries, companies may come up against higher tax levels, corruption of local officials, and even high security risks, such as political instability.

Infrastructure development is another important area

Extraction issues may also be important. Geological issues include: Q

Orientation of the deposit: Awkward orientations make handling the ore underground demanding, and a lack of strength in the rocks can make underground and open-pit development difficult.

Q

Associated mineralisation: sometimes the mineralisation of a deposit can affect the processing methods used. It is the role of the metallurgists to overcome these problems.

Q

Reserve estimation: infill drilling (both from surface and underground) is often required to upgrade resources to reserves. Companies are required to optimise the cost associated with drilling against the deposit certainty required.

Q

Complexity of mining: the costs of mining deeper can escalate and also there can be problems with ground stability and temperature at greater depths.

Geological issues can be a significant risk

Other issues include: Q

Extraction rate: because economies of scale are particularly important in the mining industry, but not all ore bodies can support a large mine. Also, the orientation and depth of the deposit can affect the rate of extraction;

Q

Effect of dilution: in an open cast mine, the stripping of the overburden constitutes dilution. In all types of mine, the characteristics of the rocks may require a company to extract a significant amount of barren rock, as well as ore, which costs money. Dilution may reach as much as 20%, which makes the operation far less profitable than it would otherwise have been;

Q

Metallurgical risks (see above).

Stripping ratio very important to profitability

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Mine development and mining methods The choice between underground or open-pit mining is one of the most important. The deeper the open pit, the greater the waste that has to be removed to yield the ore, and the higher the costs. Since it is cheaper, open pit is every miner’s first choice for a mine, especially if the deposit is a large scale, near-surface body. The first stage is for a rock mechanics engineer to assess a safe slope angle for the pit. Then, it is necessary to assess how much waste rock needs to be mined and to balance this with the mining rate. The amount of waste rock that must be mined for each amount of ore is called the stripping ratio. In most cases this decreases along the life of the mine. An open pit is only profitable if the value of the ore exceeds the cost of mining the waste.

Open pit or underground is an important question

Open pit is cheaper and simpler although planning is more involved than many people think

Table 16: Summary of features of surface mining techniques Surface techniques

Typical setting

Key features

Open pit or open cast

Surface to sub surface deposits but can extend to +500m in depth. Applies to most metals and minerals.

Generally high throughput but can be very small scale. Simple and low cost versus underground. Relatively safe operationally. Enjoys incremental economies of scale. Generally capital intensive and highly mechanised

Strip mining

Surface deposits mining thin, horizontal, near surface seams over a large area

Large scale, low cost operations that move over a large area. Overburden is removed, ore body is excavated and overburden is replaced

Dredging (includes use of suction pumps, etc)

River beds (alluvial), seabed, beach sands. Applies to heavy minerals eg, gold, diamonds, tin and titanium mineral sands.

Low to high throughput, low barriers to entry. Very low cost and highly mechanised

Source: UBS estimates

Figure 8: Explanation of stripping ratio in open cast mines Initial pit - no stripping Intermediate pit - stripping ratio now 1.5 to 1 Final pit - life of mine stripping ratio 3 to 1

Orebody A vertical or steeply dipping orebody suffers increasing stripping ratio as the depth of the pit is extended. The final depth of the pit is then determined by the economics of extraction rather than the geology of the orebody. In some cases the mining will be continued using underground techniques e.g. Palabora, South Africa

A flat or lenticular shaped orebody lends itself to low stripping ratio. The final pit depth is then more determined by the geology of the ore body and not the economics of production. A certain amount of pre-stripping may be required before production starts and this is often charged to capital costs.

Source: UBS

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For ore bodies where open-pit mining is not viable for economic or environmental reasons, underground mining is used. The method of mining is again determined by the type of ore body, coupled with its orientation, thickness and regularity.

Underground mining must be used at greater depths

Mining – digging the holes Figure 9: The mining flow sheet

Deposit

Mining

Rock

Processing

Refining

Market

Increasing Value Added Source: UBS

Mining can be broken down into three basic processes, with a fourth option: Q

Rock breaking

Q

Loading

Q

Transport (or hauling) to process site

Q

Backfilling (optional in underground mines)

The first three are summarised in the table below. Table 17: Comparison of mining processes in surface and underground operations Rock Breaking

Loading

Transport

Surface

Explosive: drill and blast Non-explosive: rip, load direct

Front-end loader, back hoe, shovel, water jet, suction pump

Truck, train, by-hand (very rare), conveyor belt, pipe

Underground

Explosive: drill and blast, gravity (block cave method) Nonexplosive: face shearers, road headers

Gravity, by-hand, mechanical loader (diesel, electric or compressed air)

Truck, train, conveyor, by-hand, vertical shaft and any combination of the above.

Source: UBS

Rock breaking generally entails the use of explosives. Some rock types, however, are soft and can be broken by mechanical means. Most of the world’s coal is broken in this way and the use of explosives in coal mines is restricted to specific situations. In some mining situations no breaking is required at all, as in the mining of diamonds off the seabed, which are quite simply sucked up a large underwater ‘vacuum cleaner’.

Rock breaking generally entails the use of explosives

UBS 105

Mining and Steel Primer 18 May 2011

Where explosives are used, holes are drilled into the rock, charged with explosives and then blasted. Drilling holes in rock uses considerable amounts of energy, the cost of which makes up a meaningful portion of mining costs. The miner must therefore optimise the blasting configuration against the level of desired breakage. In open-pit mining operations, rock is blasted in a series of benches and the broken rock is assigned to the process plant or waste rock dump, depending on the contained value. Underground, ore is produced from stopes, with access to the stopes made via tunnelling, usually in barren rock (waste), also referred to as development. The availability of a free face in the underground situation becomes more important, especially in stoping, where the free face has to be established. At a development face the free face has to be created by using a ‘cut’. This requires intensive drilling and use of explosives; therefore the cost per tonne of broken rock from development should always be more than that of stoping. Stoping methods that depend on development techniques, such as drift and fill, will always be more expensive, in terms of cost per tonne broken, than underground bulk methods such as sub-level caving. Loading is the process of moving the broken rock into a conveyance for transport to the processing plant. This can be a simple process making use of gravity to feed broken rock into rail cars, or by use of mechanical loaders to load trucks.

The rock must be moved to the processing plant

In many underground situations, broken rock has to be transferred from one system to another before arriving at the processing plant and may require that the rock is re-handled a number of times. Re-handling adds expense for little or no value added and reduces the overall efficiency of the operation. Transport is the most critical of the three processes. In most cases the mining operation is only as good as the transport system and has to be diligently managed. Rock transport can take many forms, the most common being the use of trucks both in underground and surface operations. Nearly all open-pit mines use a fleet of large trucks specifically designed for the purpose. These trucks have a capacity (payload) of 30-300 tonnes each, depending on the scale of production required. In many cases the fleet is managed by a despatch system, which makes use of GPS technology, and because of the capital-intensive nature, effective truck utilisation is critical and carefully managed.

Transport is extremely important

UBS 106

Mining and Steel Primer 18 May 2011

Figure 10: A typical underground mining operation showing extraction, loading and transport methods Head frame or headgear eyor Conv

Winding house

Mineral bearing ore to process plant

belt

Barren waste to dump

Storage Bin

= rock flow Mined out

Hoist

Face

Shaft

Haulage

Load1 Haul Load2

Stope

Waste development

Orepass Ore

Source: UBS

Underground, the shaft hoisting system is the critical element. Shafts vary in inclination from shallow to vertical. Some shallow mines use trucks to haul to surface up a system of underground roads or ramps; this is generally viable to a depth of around 400 metres. Where this is not feasible then a hoist is employed.

Shaft hoisting systems are critical to underground mines

Hoisting is generally automated and usually takes place on a continuous basis. Again the capital-intensive nature of hoisting systems, tied up in the cost of the equipment and the cost of the ‘hole in the ground’, requires maximum shaft and hoist utilisation. The hoisting system is usually fed by a horizontal transport system that might take the form of trucks, trains or belt conveyors. Conveyor belt systems are common in surface and underground operations and can be used as either the principal transport system or as part of a secondary system. Once a stope has been fully mined out, it may be necessary to backfill it with waste materials either so that ore adjacent to the stope can be mined out, or as a further means of support. Backfill may be waste rock from underground, sand brought down from the surface or processed mill tailings; it generally has some cement added to it. Backfilling may take place concurrently with the mining of a stope, or it may be carried out only when mining of a particular stope has totally finished.

Stopes may need to be backfilled to prevent collapse

Other capital-intensive systems needed for underground mining include ventilation, access declines, underground workshops, stores and drainage systems (all the water entering the mine and used in the mining process must be pumped out). UBS 107

Mining and Steel Primer 18 May 2011

Minerals processing (beneficiation) In nature, most metals – with the notable exception of gold – occur as one of the components of a compound. For example, copper is often found as a compound of copper, iron and sulphur known as chalcopyrite (Cu,FeS). In a typical copper deposit the chalcopyrite is distributed within the host rock and the overall concentration of copper may be as low as 1%. Gold is effectively inert and is normally found in its natural state but usually very fine-grained. In some gold mines the concentration can be less than 2 grams per tonne (2g/t), equating to 0.0002%. With such low concentrations, the rock has to be reduced dramatically in size to liberate the target mineral or at least expose a surface on the target mineral for further processing.

Minerals processing is the initial separation and concentration of the mineral-bearing material

Figure 11: Crushing and grinding – why is it needed? Rock ex-mine, no target mineral exposed Target mineral

Divide by 624

Target mineral now mostly liberated from host rock

Source: UBS

There are exceptions. Coal is washed and sized according to the customer requirements and rarely undergoes grinding on the mine site. In some operations, such as the mining of beach sands for titanium minerals, the process bypasses crushing and grinding and goes straight to concentration. All mined material requires some processing to yield a marketable product. Processing plants are generally sited on the surface at or near the source mine and the typical process flow is as follows: Q

Crushing and grinding

Q

Concentration

Q

Refining

Some materials, such as coal, can bypass the minerals processing stage

Some operations, such as diamond mining from the seabed, only require the final steps of concentration and refining, and not the first steps of crushing and grinding. UBS 108

Mining and Steel Primer 18 May 2011

Crushing and grinding reduce the size of mined (referred to as run-of-mine) rock to a predetermined size, usually that of fine sand, so that the next step of concentration is effective. Crushing and grinding is expensive so there is a tradeoff between grinding for total liberation and accepting that some of the target mineral will be lost.

Crushing and grinding is the first stage to reduce particle size

Concentration is the first real value-adding stage and significantly raises the concentration of the target mineral. There are two broad categories:

Concentration starts to add value

Q

Physical (including flotation, gravity, magnetic)

Q

Chemical

Of the physical methods, flotation is the most important. In froth flotation the physical properties of the target mineral are manipulated through the addition of reagents, so that the mineral will attach itself to air bubbles in liquid. These bubbles, with the target minerals attached, form a froth at the surface of each flotation cell and are simply skimmed off leaving the waste or gangue material behind. The basics of the process are shown in the diagram below.

Froth flotation is commonly used in copper, lead, nickel and zinc processing

Figure 12: Basic features of froth flotation

Compressed air Reagents

Feed

Froth

The nature of the surface of the sulphide grain is reconditioned by the addition of reagents to make it water-averse and attracted to air

Air bubble Concentrate

Sulphide grains Agitator

The grain will then attach itself to an air bubble which floats to the top of the cell and the froth is simply skimmed off as a concentrate Barren waste to retreatment or tailings Source: UBS

UBS 109

Mining and Steel Primer 18 May 2011

Flotation is very important in the sulphide-based metals, including copper, zinc and lead. Copper, in particular, is the product of flotation, with around 75% of mined production being derived from the process. Gravity and chemical methods are also used. Gravity concentration simply uses the difference in specific gravity of the target mineral and the host mineral to capture the valuable part. Panning for gold is its simplest form. One other method of concentrating can be nothing more than physical sorting, such as is used in diamond production, mechanised using optical techniques. Chemical concentration methods are manifold, but the important methods are: Q

Dissolution

Q

Solvent extraction

These processes fall under the general categorisation of hydrometallurgy and some processes may include any combination of the above. Dissolution can take place either under ambient conditions, or under specific conditions of temperature, pressure and acidity. Where temperature and pressure are raised, the process is called autoclaving. In Australia a number of nickel deposits, known as laterites, are processed under high pressure, heat and acidity and this process is called pressure-acid-leach or PAL. In many cases, mines produce a concentrate that is then sold on to specialist refineries and smelters for final refining before going to market. The waste products from concentration are known as tailings and are dumped.

Hydrometallurgy is a method of chemical concentration

In the PAL process the feed is put into a pressure vessel where the temperature and pressure are raised and the pH is lowered (to raise the acidity). This has the effect of essentially dissolving all the components of the feed. The solution is then de-pressurised, known as flashing, and the nickel and cobalt are recovered selectively, or together as a precipitate or a mixed sulphide, or as metal through electro-winning. Engineering in the PAL process to the scale required has proved problematic and costly, and none of the original projects have been able to sustain production at the design level. However, steady progress is being made and the technology may yet prove to be key in terms of sourcing nickel in the future. SX/EW stands for solvent extraction/electro-winning, and refers to a process that bypasses many of the energy-hungry steps of crushing and grinding. Metals are leached to form highly concentrated solutions, which can then be separated using solvent extraction. The target metal is then extracted from solution in an electrolytic cell. For many years very large, low-grade copper deposits were known to exist but were uneconomic using the prevailing technology. As such, they were ignored or mined and dumped as waste to access deeper high-grade sulphide deposit. With the development of SX/EW in the 1980s, many of these low-grade copper deposits have been successfully exploited. It should be noted, however, that SX/EW only applies to parts of a sulphide orebody near to its surface, that is, those parts that have been oxidised; therefore the resource base for SX/EW is far more limited. The expansion of this process has lifted the consumption of acid and the sulphuric acid prices.

SX/EW provides an economic way to treat low-grade deposits

UBS 110

Mining and Steel Primer 18 May 2011

Mining takes place conventionally and the ore, after minimal treatment, is stacked on impervious membranes known as leach pads. The stacks can be several tens of metres high. Acid, usually sulphuric acid, is then delivered to the top of the stack via drip lines or sprinklers. As the acid percolates through the stack the copper is dissolved and the solution (in the form of copper sulphate and known as a pregnant solution) is collected at the bottom of the stack. The solution is further purified by solvent extraction that involves the selective transfer and re-transfer of the copper solution into and out of an organic liquid. Electrolysis is then utilised to plate high-purity copper on to stainless steel cathodes. In many cases the end product is acceptable for delivery to the London Metal Exchange with a purity of 99.99% copper. Refining is the final step before releasing the product to market and adds significant value. There are three important methods: Q

Electro-winning

Q

Pyro-metallurgy (smelting)

Q

Precipitation

Q

Physical sorting

Refining is the final step in producing metals

Pyro-metallurgy and electro-winning are the most important. In electro-winning, still a hydro-metallurgical process, electrolysis is used to capture the target metal and very high levels of concentration, up to 99.99%, can be achieved in this way. Pyro-metallurgy uses very high heat to melt, separate and concentrate metals, but this method is energy intensive and costly in both capital and operating cost terms. As a consequence, many smelters/refineries make use of a combination of pyro-metallurgy and electro-winning. In the process the concentrate, which generally arrives direct from the mine in the form of a sulphide, undergoes three stages of processing, namely: roasting, smelting and converting, and refining. In the roasting stage the sulphur is driven off (it is generally then used to produce sulphuric acid). During smelting and converting more sulphur is driven off, along with iron and other impurities, which are collected as slag. The molten matte is then cast to produce anode plates. In the final refining process the anodes undergo electrolysis to produce high-purity cathodes as described above. Many smelters may recast metal to the final customer specifications.

Metals may be extracted using electric currents in electrolysis

Primary aluminium is produced by electrolytic techniques. The raw material for aluminium production is alumina, which is refined from bauxite. In the HallHeroult process, alumina is dissolved in molten cryolite (a complex sodium aluminium fluoride mineral) in a reduction pot and high-amperage direct current is applied. In the reaction, the oxygen in the alumina is driven off and molten aluminium is then tapped off, with the cryolite being recycled.

Aluminium is a good example of metal extraction using electrolytic techniques

UBS 111

Mining and Steel Primer 18 May 2011

However, the process is extremely power-hungry and around 40% of the processing cost in aluminium production is power (conversely aluminium recycling requires only 5% of the power required to produce primary aluminium). Consequently, aluminium smelting takes place in regions of traditionally low power prices, usually associated with hydro-power (prices greater than US¢3.5/kwh are generally not economic). Such power resources, however, are subject to the vagaries of climate change and poor management, as has been seen in the Pacific northwest of the US and in Brazil. The process is also polluting, with large amounts of CO2 and trace fluorine being produced as the carbon anodes are consumed in the process. This has put pressure on aluminium companies to find an alternative process.

The end of the road – what’s left? All that’s left at the end is the waste from the various processes (some of which may be recycled) and the refined product. What happens to the non-recyclable waste has become the subject of much greater interest in recent years. Harmful substances from mines are normally the waste products of processing, although sometimes the waste material from the mining process itself can be dangerous. Waste rocks may contain sulphides that react with water and oxygen at the surface to produce acids such as sulphuric acid; run-off water from mines is often run through a treatment plant to clean it. Waste rocks themselves may be used as backfill, although there is often much left over and all mines have to be designed with provision for a waste rock dump that will not collapse and will be insulated from the local groundwater.

Disposal of waste is an important aspect of mining

Waste from processing may be harmful

The milling, smelting and refining functions can also generate waste materials. Waste water from milling and other processes may contain organic and inorganic compounds, which also must be disposed of. For example, in gold extraction the weak cyanide-containing solutions must be broken down into their core elements; the waste waters may be held in a pond where sunlight and air help to break the cyanide down, or using a cyanide destruction process. Tailings, the solid waste from the milling process, also often contain hazardous waste materials. Examples of these are the arsenic commonly found in waste from gold ores and the radioactive products found in uranium waste. Tailings may be disposed of in a tailings dam, or pond, which is designed to keep the by-products where they are and prevent them from reaching the environment, either by the effect of wind or water. When a tailings dam gets full, it must be capped with an impermeable material to prevent leakage, which is then usually seeded to allow plants to grow on the surface and help to prevent erosion of the cap.

Solid waste may be stored in a dam or pond, which may be capped to prevent leakage

Waste gases are also an issue, and the mining industry has made giant strides in recent years in scrubbing waste gases, such as sulphur dioxide. However, there is still some way to go in solving this problem (it is estimated that some 60% of all sulphur emissions in the atmosphere come from smelting and other industrial activity).

Waste gases must be scrubbed

UBS 112

Mining and Steel Primer 18 May 2011

Steel – a major subset of the metals industry Steel is one of the most important, multi-functional and adaptable materials in use today. Properties that allow this multifunctionality include the fact that it is hot and cold formable, weldable, has good machinability, is hard and resistant to corrosion, wear and heat. Among a myriad of uses, some of the most important are in cars, as a support material in construction, power lines, pipelines and containers.

Steel is one of the most important metals

Steel manufacture During the mid-nineteenth century, the age of steel began with the invention of the Bessemer process in 1856, which allowed large-scale production of steel at reasonable cost. Bessemer’s breakthrough was based on getting carbon out of cheap carbon-rich cast iron, rather than getting carbon into low-carbon wrought iron. This he accomplished by blasting oxygen through the iron mix, which oxidised the carbon to form CO2. The process was modified at various times later in the century by introducing small amounts of other metals into the mix. For instance, the introduction of manganese strengthened the mix, allowing the production of construction steels, and alloying with chrome and nickel produced stainless steel.

Iron usage dates back 6,000 years

The development of the industry progressed further during the twentieth century, with more attention being paid to the forming process. The Hot Strip mill was invented in America, allowing massive blocks of metal to be broken down into ribbons and then coiled. This innovation led to the emergence of the automobile age, metals packaging and many consumer goods.

Hot strip milling

With the establishment of a volume steel economy, scrap steel also started to become important. Electric arc steelmaking became one of the most significant recycling processes. Further developments meant the steelmaking process became faster and faster – 50 years ago to reach strip form from raw materials took over a week, now it can take as little as eight hours.

Electric arc furnaces

Raw materials used for steel manufacture There are three main raw materials for steel; iron ore, coking coal and scrap. Iron ore: Trade in iron ore has grown with steel production, particularly in China. The major exporters are Australia, Brazil and India. The dramatic growth in China’s imports has driven bulk freight rates to record levels. Approximately one and half tonnes of iron ore are needed to make one tonne of steel.

Traded iron ore generally contains 6068% iron in oxide form

Coking coal: Coking coal is the other key raw material for the production of steel via the blast furnace process. Coking coal has specific physical properties that allow the coke produced from the coking coal to sustain the blast furnace charge. Coking coal has been in short supply in 2008 because of operating problems in key production areas of Australia. Settlement prices in 2008 of US$300 per tonne are double the level in 2007.

Coking coal used to make coke, a key blast furnace ingredient

UBS 113

Mining and Steel Primer 18 May 2011

Scrap: Scrap steel is used mainly in electric arc furnace production of steel, although 15% of the charge to the basic oxygen furnace is also scrap. Scrap is classified as home, prompt or obsolete. Home scrap is generated in the plant, but supply has decreased in recent years owing to the advent of continuous casting. Prompt scrap is from steel product manufacture, and the supply of this is also waning. Obsolete scrap is most people’s idea of scrap – it is post-consumer scrap, such as shredded cars, consumer products, etc. Home and prompt scrap are of low quality and are low in residuals, while obsolete scrap is high in residuals and cannot be used in large quantities for production of high-quality steels.

Scrap or recycled material used in both electric arc and blast furnace processes

The IISI estimates that some 490 million tonnes of scrap (38% of total output) were consumed in the steel industry in 2007, with China and Turkey being the largest net importers and the CIS and the US being the largest net exporters.

Steel production There are two major methods of steel manufacture. The bulk of steel is made in blast furnaces (65-70%), which are integrated, large-scale operations (that have to be sized at 3-4 million tonnes per annum to be economic), while approximately 3035% comes from electric arc furnaces (also called EAF or mini-mills), which are normally much smaller operations of 200-300,000 tonnes per annum. Figure 13: The iron cycle in steel production

Source: Gerdau, UBS

UBS 114

Mining and Steel Primer 18 May 2011

Blast furnace/basic oxygen steel making starts with the sintering of the iron ore and other fluxes. The materials are crushed, homogenised and mixed with limestone and coke. The mixture is sintered and then fed, in alternating layers with coke, into a blast furnace. This is injected with hot air and the coke burns to produce carbon dioxide, reducing the iron oxide to produce pig iron (94-96% iron, 3-4% carbon and 1-2% non-ferrous elements).

EAFs are smaller scale but have yet to replace blast furnaces

Electric arc furnace technology offers the advantages of lower capital cost and utilises scrap as the primary raw material. The process economics also relies on cheaper power. The smaller production scale, linked with thin casting technology, also offers logistic and flexibility benefits. These competitive advantages have been eroded in recent years, with dramatic increases in both scrap and energy costs. The limited ability of EAFs to produce flat products, for example sheets and tin plate, has also constrained this method. Steel products can be broadly classified as flat and long products. Flat products are those products such as slabs, which may be converted into hot rolled or cold rolled coils and/or coated. They are used primarily in manufacturing industries, such as white goods and autos. Flat rolled products are usually made by integrated producers. Long products are used for construction-type applications (I-beams, rebars). They are usually of lower quality and are generally produced by EAF plants. Q

In the basic oxygen furnace, pig iron from the blast furnace is purified in an oxygen converter (basic oxygen converter, BOC) and combined with additional products, such as limestone and scrap, which burn off most of the unwanted metals and other contaminants, leaving crude steel as the end product. Addition of other metals, such as manganese, occurs at this stage for specific alloying characteristics.

Q

In the EAF, steel is recycled from scrap. Heat is supplied from electricity that arcs between graphite electrodes and a metal bath. This process is suitable for almost all stainless steel and other alloyed steel products, and for most long carbon steel products. However, it is not a competitive production method for high purity flat carbon steel products. Generally the scrap-based process is advantageous with respect to investment cost and the flexibility of operations.

Flat products better quality, long products used for construction; normally made by EAF plants

The molten steel then undergoes continuous casting, whereby it is converted to semi-finished products. The molten steel is poured and solidified to produce either blooms or billets (which may be transformed into long products), or into slabs (used for flat products). All semi-finished products are then rolled at high temperatures, a process known as hot rolling. They are drawn and flattened through rollers to give the metal the desired dimensions and metallurgical properties.

Products rolled at high temperatures are known as hot rolled (HR)

Some steel products go through an additional step of rolling at ambient temperatures (a process known as cold rolling).

When they are cooled and then rolled, they are called cold rolled (CR)

UBS 115

Mining and Steel Primer 18 May 2011

For cold rolled applications, coils are placed in the annealing furnace and heated to 750 degrees centigrade, then gradually cooled to room temperature over a four-day period. This softens and stress relieves the metal to give it uniform properties for future fabrication. Oil may be applied to the surfaces for protection from rust. A final operation, such as coating with zinc (hot dip or electro-galvanised sheet for the automobile industry) or tin (tin plate for tin and beverage cans) may then be carried out.

Coating (where applicable) is the final process

Figure 14: Manufacture of steel products

Source: Gerdau, UBS

Modification of steel properties Properties of steel may be modified by the addition of small amounts of other metals or metal oxides to the structure of the steel. Stainless steel is an example of this process, where the addition of nickel and chromium makes the steel more rust resistant. This should not be confused with the process of galvanising, whereby steel is coated in zinc after processing.

Properties may be modified by including a variety of trace elements

The table overleaf lists a number of trace elements that are present in alloy steels, their properties, and the resultant uses of the new alloys.

UBS 116

Mining and Steel Primer 18 May 2011

Table 18: Trace elements used in alloy steels Trace element

Proportion

Effect

Uses

Manganese

0.3-0.8%

Reduces oxide formation and counteracts the influence of iron sulphide

All commercial steels